What is a "Will Substitute" and why could it ruin everything?

A "Will Substitute" is an instrument that transfers ownership of property from the owner to the beneficiary upon the owner's death while avoiding probate. Examples of will substitutes include the "Payable on Death" ("POD") designation of a bank account or the beneficiary designation of a life insurance policy.

PODs and insurance contracts are powerful agreements! Money in your account or cash from the death benefit will be transferred to the named beneficiary when the owner dies EVEN IF the owner has a will and regardless of what that will says. The POD provision overrides the directives of a will or replaces a will altogether as it pertains to the specific asset.

Therefore, be cautious and thoughtful when you open a bank or investment account and consider a POD. Sometimes a POD is helpful in an estate plan but other times it may have unintended consequences. If you want the assets in your account to be divided equally among your children upon your death but you have named only one child as the POD, guess who gets the money?! Your other kids will have to rely on brother or sister to share the proceeds, which sharing, to make matters even more troubling, may have unintended tax consequences for him or her.

Joint ownership of an account is another type of will substitute. This commonly occurs when an elderly parent needing help to manage finances and pay bills, adds an adult child as a joint owner. The parent may eventually want the child to inherit the money. However, going about it this way is an awful idea! If that child incurs some liability for something such as an accident or a personal debt, he or she will be pursued by creditors. And guess what account the creditors will find?! The same objective of helping mom or dad pay the bills without exposing the account to creditors can be achieved with some smart yet simple estate planning.

So before you unwittingly disinherit your loved ones or expose your assets to the liability of others, make sure you carefully consider these issues. Plan smart and keep things safe!