Most people want their money and assets to go directly to their loved ones after they die. Unfortunately, sending your property through probate runs the risk of creditors making claims to your estate to fulfill your unpaid debts. Fortunately, people can bypass probate for certain assets by naming beneficiaries.
However, problems may arise if you count on a single beneficiary in your designations. Your assets could fall into the hands of creditors in spite of your efforts.
Asset transfers through designation
Several types of accounts and policies allow the owner to designate beneficiaries who will receive the assets upon the death of the owner. These include life insurance policies, retirement accounts such as 401(k)s and IRAs, annuity contracts, some investment accounts and bank accounts with a payable-on-death designation.
When an account or policy has a valid beneficiary provision, the assets transfer directly to the named individuals or entities. This simple process avoids probate entirely for those assets. Still, this depends on the beneficiary being alive and available to receive the asset.
When there is no beneficiary
Consider what might happen if your intended beneficiary dies before you do. This means there is no designated person to pass the asset to. Instead, the asset will go into your estate. This creates an opportunity for your creditors to try to take the asset since it is part of your estate.
Backup beneficiaries as a solution
By selecting one or more individuals as backups to your primary beneficiary, you can ensure the proper distribution of your assets outside probate. This is especially important after a major life event such as marriage, divorce, death or the birth or adoption of a new child, as you may account for new family members in your estate plans.
In the event your primary beneficiary dies or otherwise cannot receive from you, your estate plans still can provide a safety net so that you need not worry about losing property to pay off debts after your death.
