Estate Planning Using Beneficiary Designations - Oh My!

Let me explain the problem with this Get Out of Probate for Free method of estate planning with an example story. This story is all based on real events that gave rise to the same problematic ending but uses various clients to create the entire story:

Ms. Sally Retired owns a house and three bank accounts. She has three children. She comes into our office and creates a will leaving everything equally to the three kids. The estate plan deals with all issues. Afterwards, because her banker tells her of a way for her bank accounts to avoid probate, she decides to save on probate costs and creates POD (pay-on-death) beneficiaries on each bank account, one child per account. In other words, each account transfers to one child, based upon the beneficiary designation on that account. She then dies from a serious illness.

Once the children get the death certificates, they collect on their account mom left to them. Unfortunately, the accounts are various values since she used one for some medical bills and another received additional funds that she received from an inheritance before she died. Needless the say, the children are not happy. They are further upset to learn that mom had refinanced the house because the mortgage broker told her about a great refinancing deal and she used the funds to pay off credit card bills. Like most Arizonans, her mortgage exceeds the equity on the house and is inverted. Come to find out that because she refinanced the house, it is not a purchase money mortgage so if the house is foreclosed, the lender can collect the deficiency amount owed. Furthermore, because mom only had Medicare, the large amounts still owing the medical providers are coming in and they want paid.

Outcome: The kids ask the lawyer if they can not file probate on the Will and just ignore the creditors. Our office tells them that they still need to file probate to resolve these creditors. Even if they don't file probate, creditors can petition the court 45 days after mom's death, get themselves appointed as executor (Persona Representative in Arizona), and sue each of the children to return what they received outside of probate, namely the bank accounts that named them directly as beneficiary, to pay off these debts. I think you know how this ends up. One child feels the others should pay more since they received more from mom's bank account. The others feel that this is a debt of the estate and each heir is equally obligated. Not being able to resolve this, and pretty much hating each other at this point, they get sued by the creditors, then they sue each other, and spend a lot of money in attorney fees to resolve what mom thought was a inexpensive means to avoid probate.

Comments: This story is too often the case. I have yet to see an estate distribute equally and without probate using this beneficiary designation method of estate planning. Too often probate ends up being required and in almost every case, at least one child is hurt and no one is speaking. How much easier if mom would have either just relied upon the Will to divide the assets AFTER the debts were paid or, to avoid probate, placed her house and bank accounts in a trust for a non-probate method to transfer the assets to her kids. So even though there may be a way to equally divide the assets between all the heirs, you still have the issue of debts. The only way to resolve the debts is by probate of a Will or under a trust administration, which tends to be the least expensive method of estate administration.