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If you are a beneficiary, you probably have some work to do

by Robert Bailey | Contributor
April 10, 2022

Often, when we think of being a beneficiary, our minds tend to focus on the inheritance with less focus on obligations, complications and questions we may encounter along the way. While most know the personal representative (also known as the executor) is responsible for notifying the beneficiaries and distributing the estate in accordance with the terms of the decedent's will, a beneficiary has certain obligations as well. As a beneficiary, it is important to be aware of these obligations.

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So, you might ask, what are a beneficiary's obligations? On a basic level, once a beneficiary has received an inheritance, they are responsible for managing whatever they received as they would with the rest of their finances. This includes obligations like making sure you pay any taxes that are due as a result of your inheritance. In some cases, a decedent may even leave specific instructions for how the assets should be managed by a beneficiary.

Communicating with the personal representative, other beneficiaries and an attorney who specializes in estate planning can go a long way in ensuring you fulfill your obligations as a beneficiary.

General complications and questions beneficiaries may encounter

But what if there are complications or uncertainties along the way? It's an unfortunate part of the process, but sometimes these complications arise and oftentimes are unexpected. Some of these potential issues may be a result of the manner in which the estate was left while other times it may be due to the individuals involved in the administration and inheritance of the estate.

Before we get into specific scenarios, here is a general tip — be proactive. For instance, when beginning the process, if there is a particularly contentious relationship between the beneficiaries or an executor, it may be wise for all parties involved to agree to hire an independent fiduciary to handle the administration of the estate. A decision like this upfront could avoid unnecessary delays and litigation as a result of disagreements between family members and other parties involved.

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So how do some of these complications arise once the estate administration process has begun? Unfortunately, a recurring central theme is a lack of communication between the beneficiaries and the personal representative. Unnecessary complications can be avoided if you have a personal representative who is proactive in delivering information to the beneficiaries.

Ineffective communication from a personal representative, or between beneficiaries, can lead to needless misunderstandings, and could even result in a beneficiary contesting the will or the administration of the estate. This could have a significant impact in delaying the administration of the estate and unnecessarily diminishing a beneficiary's future inheritance.

To avoid these circumstances, beneficiaries should be proactive in their communication with the personal representative and in asking for important information about the estate. Doing things like requesting a copy of the will, a list of outstanding debts and an inventory of the estate's assets can help prevent any disagreements both with the personal representative and among the beneficiaries.

However, for some estates there are certain delays that are unavoidable. Basic delays can occur, for instance, due to a lack of available liquid assets or the need to pay various debts and taxes. There are complex issues that can arise while handling these matters. A personal representative may have to dispute a claim against the estate if they believe the claim isn't valid or was already paid. If not resolved directly with the purported creditor, the court will likely have to oversee a hearing and make a determination on the claim.

Also, property located in another state can further delay the administration as the personal representative may have to engage in a separate probate process in the state the property is located. Finally, there is always the chance that a personal representative may be unable to locate a particular beneficiary.

Depending on the state handling the probate process, an executor may be able to simply separate their inheritance and distribute the remaining funds to the other beneficiaries. However, there may be requirements such as publication of the estate or an heir search before the administration of the estate can be finalized. The executor could also decide it's in the best interest of the estate and beneficiaries to have the court make a decision as to what to do with the missing beneficiary's inheritance.

Complications with non-probate assets

Another often under looked area where complications may arise is when non-probate assets, or “will substitutes,” are involved in a decedent's estate. For some quick background, probate is the process through which a court determines how to distribute the property of a decedent. All assets owned solely by the decedent with no designated beneficiary will go through this probate process, whether the decedent died with a will or not.

Other items, however, are considered non-probate because someone else has an ownership interest in them. While not an exhaustive list, some examples of non-probate assets include the following:

  1. Joint bank accounts
  2. Accounts with a transfer-on-death (ToD) or payable-on-death (PoD) designation
  3. Life insurance policies
  4. Property held in trust
  5. Brokerage accounts

Before we discuss potential complications let's be clear, there are many advantages to having non-probate assets. Most significantly, it avoids what could be a costly and time-consuming probate process. Having non-probate assets can shorten the time it takes for a beneficiary to receive their inheritance as they won't have to deal with the probate process, which includes things such as the appointment of a personal representative, searching for and collecting assets, paying bills and filing taxes. For probate assets, typically all of this has to be done before any assets are distributed to the beneficiaries.

So, a beneficiary may ask, what exactly are the risks and complications involved with non-probate assets? Looking at some particular scenarios will be helpful in understanding these potential complications. So first, let's look at it in the context of marriages. If you live in a community property state, a spouse of the decedent is entitled to 50% of their assets regardless of assets with a designated beneficiary. This could alter an individual's estate plan significantly if the decedent intended those non-probate assets to go solely to the designated beneficiary.

Another issue is if a decedent fails to update their non-probate assets after a divorce. What happens if a decedent failed to update their non-probate assets when they updated their will and there is a non-probate asset that inadvertently has an ex-spouse listed as the designated beneficiary? Depending on the state you live in, there may be nothing you can do about it.

Even if the designated beneficiary is willing to transfer the non-probate property in accordance with the terms of the decedent's will, they may be unable. For example, if the designated beneficiary of the non-probate asset has any creditors, a transfer to a beneficiary listed in the will might be considered a fraudulent transfer, despite having the best intentions.

Even if you may have the correct beneficiaries listed, other issues can arise. What happens if the only designated beneficiary dies? Unless a backup beneficiary is named, the asset could pass to the estate and someone not originally intended may inherit it. Or it could be a non-probate asset with several designated beneficiaries.

In this scenario, the speed at which that asset is transferred to the beneficiaries will be based on the slowest moving beneficiary. Simple things like filing a transfer-on-death beneficiary affidavit and other necessary paperwork will need to be completed by all designated beneficiaries before the asset is transferred. A situation like this could significantly slow down the process if you have a procrastinating or missing beneficiary.

The number of non-probate assets is another factor that can bring with it some other unexpected complications as well. If the estate has too many non-probate assets, the personal representative may not have sufficient probate assets to manage the estate. This could lead to situations where an estate's assets are sold below market value to pay bills or real property is not properly maintained because the estate has no available funds. While this can hurt the estate itself, insufficient probate assets could also lead to a creditor coming after your non-probate asset, even long after you received the inheritance, and possibly even spent it.

Just a lack of understanding on how non-probate assets fit into an estate plan can lead to complications and disputes. Without proper guidance, an individual could set up their estate with the intent to give beneficiaries an equal inheritance, yet the beneficiaries may end up with disparate results. This can happen for at least two different reasons.

Let's say a parent wanted to give an equal amount of money to two children, with one receiving a non-probate asset and the other receiving a probate asset. How could this result in these two beneficiaries receiving very different inheritances? Let's illustrate this with an example of this parent.

So, this parent has an investment account worth $250,000 when they designate child No. 1 as the beneficiary. At that time, the parent's house is worth approximately the same amount, which the parent leaves to child No. 2 in their will. The parent assumes this is a fair way to split up the future estate's two primary assets. As time passed both assets appreciated, but the parent had to take out a home equity loan on the house to get a new roof and finish the basement.

At the time of the parent's death, the house is worth $300,000 with $30,000 remaining on the home equity loan. The investment account has grown to $350,000. On its face, child No. 1 ends up receiving $80,000 more than child No. 2, but that's not the end of the story. Administrative costs and estate taxes due will come out of the probate estate, not the non-probate investment account. Between personal representative fees, taxes and other costs, the estate has to pay an additional $40,000.

When all is said and done, child No. 1 ends up receiving $120,000 more than child No. 2 despite the parent's intention to split assets evenly among their two children. This could lead to serious disharmony between the two children and even the potential for legal disputes that drag out the administration of the estate and further drain the inheritance of both children.

There are other specific complications with non-probate assets that extend beyond the administration of the estate itself as well. Certain protections to the beneficiary are lost with some non-probate assets such as PoD and ToD accounts or, really, any type of inheritance that isn't held in a trust. For example, if you receive an account as a ToD beneficiary, those assets are generally not protected from things such as divorce, lawsuits or a beneficiary's creditors. In circumstances where the beneficiary has special needs or a disability it could even lead to a loss of government benefits.

These warnings are not meant to scare you away from non-probate assets as they certainly can be beneficial for both the estate and the beneficiary. It is a warning though that if an estate is not planned properly, non-probate assets could end up costing an estate and beneficiary a significant amount of money and could lead to an unintended distribution of assets. That is why it is imperative for those planning their estate to seek out an attorney experienced in estate planning to ensure that their assets are protected and distributed according to their specific intentions.

Importance of family communication

A fundamentally important element to avoid most of these issues and complications is to engage in ongoing family communication. This includes communication between an individual and their planned beneficiaries before they pass as well as communication between the beneficiaries and personal representative throughout the entire administration of the estate.

Family communication is an essential aspect of the estate planning process. Failure to keep the lines of communication open could leave your family in a difficult position emotionally, legally and financially, despite the most well-written estate planning documents. There is no better way to avoid misunderstandings and make sure your intentions are abundantly clear than to have a frank and open conversation with your loved ones about your intentions for your estate.

While the estate planning documents may be clear, providing the “why” to your decisions can go a long way in ensuring family harmony during the administration of the estate. Explaining to your loved ones why you chose the particular personal representative you did or why you left a certain item to a particular beneficiary can go a long way in preventing any family discord when the time comes to divide the inheritance. Also, having them understand what is part of the estate can help the personal representative and beneficiaries avoid any uncertainties and suspicions when the time comes to split up the assets.

Family communication is not only essential in the estate planning process, but equally so during the administration of the estate as well. Expectations among the beneficiaries and personal representative should be set at the very beginning, and all voices should be heard. This is especially essential when dealing with multiple beneficiaries that may have varying needs and expectations as to what inheritance they are going to receive and when they are going to receive it.

The level of communication may vary depending on the complexity of the estate, but it should be present regardless of how straightforward an estate may appear. Communication in all scenarios is essential to ensure the smoothest and quickest distribution of a decedent's estate. The more communication the less there is a chance for disagreement and general discord.

If necessary, have an attorney or accountant communicate directly with the beneficiaries as well to remove any potential concerns or misgivings. Not only can this save the estate a significant amount of money, it can also ensure family relationships are not unnecessarily tarnished.

Conclusion

Being a beneficiary should not be unnecessarily stressful. While issues may arise along the way, working with a knowledgeable Legacy Plan Network Attorney and engaging in strong family communications can help resolve most of these issues in a straightforward manner. In addition, while no estate is the same, being prepared and knowing your obligations and the potential complications you may face can go a long way. Not only can it properly set your expectations, it can also assist you in being proactive ahead of time to ensure your loved ones' estate plans are adequately prepared and communicated to fulfill their desired wishes and expectations.

How do I create an estate plan?

There are numerous options and scenarios to consider when developing an estate plan that protects your legacy and achieves your objectives, and important decisions should be made with the advice of qualified lawyers and financial experts. Membership with Legacy Assurance Plan provides members with valuable resources and guidance to develop comprehensive estate plans that take life's contingencies into consideration and leave a positive impact for generations to come. Legacy Assurance Plan members also receive peace of mind that a team of trusted, experienced professionals will assist them in developing legal, financial and tax strategies that will meet their needs today and for years to come through periodic reviews.

This article is published by Legacy Assurance Plan and is intended for general informational purposes only. Some information may not apply to your situation. It does not, nor is it intended, to constitute legal advice. You should consult with an attorney regarding any specific questions about probate, living probate or other estate planning matters. Legacy Assurance Plan is an estate planning services company and is not a lawyer or law firm and is not engaged in the practice of law. For more information about this and other estate planning matters visit our website at legacyassuranceplan.com.

Phone - 844.445.3422
Email - info@legacyassuranceplan.com
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