The Big Probate Lie Financial Institutions Tell

There is one, big lie about probate that financial companies tell their clients all of the time. Unfortunately, many of the professionals at these banks and institutions have no idea that they are telling this lie or how disastrous it actually is to their client’s estate and family.

The lie is “our accounts are beneficiary driven, so they avoid probate."

Most of our clients come to us to help them plan an estate that avoids probate as much as possible. This usually means setting up a revocable living trust, and, to the extent possible which also makes sense tax-wise, have assets set up in the name of the trust so when the person passes on, those assets avoid the probate court process. However, many of the characteristics our clients consider to be “probate” also applies to these so-called “beneficiary driven” accounts.

Let me be clear about which accounts I’m talking about. The accounts that have given our clients’ families the most problems are brokerage accounts, mutual funds, and bank accounts. In general, we don’t usually see the same probate problems with IRAs, 401ks, and life insurance. 

Here’s what we are seeing happen to these so-called “beneficiary driven” accounts at the death of the account holder:

• The person owning the account dies, and the financial institution is notified. 

• The financial institution typically demands to have a copy or original of a death certificate, filled out forms related to the beneficiary claiming the account (and how to set up new accounts with their institution), and LETTERS TESTAMENTARY OR LETTERS OF ADMINISTRATION. These are papers from the probate court for an account that supposedly avoids probate. 

• Meanwhile, when someone dies and a probate estate needs to be set up, the appropriate Personal Representative (meaning the executor or administrator) has to fill out a lot of paperwork which includes a preliminary inventory of all assets, an oath, cover sheet, and related forms. So, what needs to be on that preliminary inventory? All financial accounts, including accounts that have a beneficiary designation on them. If accepted, the court will then issue the Letters Testamentary or Letters of Administration that you need to send to the financial institution that told your loved one that the account avoided probate because it was “beneficiary driven.” 

• OK, so now you sent that paperwork in just to get the financial institution to pay the money to the beneficiaries. Is probate now over for that account? NO. Now, at least in North Carolina, the court is insisting that because you disclosed there was an account with a beneficiary designation on it, that the court needs to see the paperwork on file with the financial institution showing there was a pay on death beneficiary. This is often referred to as a “signature card.” So, to sum this part up... THE PROBATE COURT WANTS YOU TO PROVE THAT AN ACCOUNT AVOIDED PROBATE BY GETTING PAPERWORK FROM THE FINANCIAL INSTITUTION THAT TOLD YOU THERE WOULD BE NO PROBATE JUST TO PROVE THE ACCOUNT AVOIDED PROBATE.

When our clients want to avoid probate, they are expecting the person they name as trustee to not have to deal with court paperwork at all with accounts that are designed to avoid probate. How exactly is 1) having to get court paperwork just to cash in an account, 2) having to record the account on probate inventories, and 3) having to provide paperwork from the financial institution to the probate court actually avoiding probate? It isn’t. The only difference in a probate estate is that the “beneficiary driven” account doesn’t need to document a precise date of death value to the court, and the account isn’t subject to the 40 cents for each $100 as a probate court fee in North Carolina. All of the other aggravating and tedious paperwork is still needed for both the court and the financial institution.

Unfortunately, things are starting to get even worse than the “our accounts are beneficiary driven” lie; we are seeing an increasing rate of financial professionals telling our clients to not retitle their accounts into the name of their revocable living trust in accordance with our legal estate planning advice and to just name the beneficiaries directly because “our accounts are beneficiary driven.”

This is the point when the financial professional has crossed a serious line into the unauthorized practice of law.

While it is perfectly acceptable for financial institutions to explain how beneficiary designations on their institution’s accounts work when setting up an account, the moment the financial professional tells you to ignore the attorney’s advice because they supposedly know better, they are now giving legal estate planning advice. In fact, if a financial professional is asked “should I just name beneficiaries or retitle my account into the name of my trust?” any answer other than “check with your attorney” is giving legal advice.

For more information on the negative effects of naming beneficiaries on an account versus following the attorney’s advice on using the revocable living trust, please check out the video “The Big Probate Lie” at https://youtu.be/gIQ2P001rHc.

NOTE FOR OUR EXISTING TRUST CLIENTS: Please do not take the general information in this article as a change in our specific legal advice in your specific case regarding retitling accounts or changing beneficiary designations. As I referenced in the article, there are often tax or other considerations that we specifically reviewed for your individual circumstances that overrides this general information.