Will substitutes are legal mechanisms that transfer property at death without going through probate court. These arrangements pass assets directly to named beneficiaries or co-owners, operating independently of whatever your will says. Many people use combinations of will substitutes and traditional wills to create complete estate plans.
Our friends at Patterson Bray PLLC discuss will substitutes as often-overlooked components of estate plans that already exist in many portfolios. A probate lawyer can help you review which assets pass outside your will and whether those arrangements align with your overall goals. The coordination between will substitutes and your formal estate plan matters significantly.
Understanding will substitutes helps you see the complete picture of how your assets will transfer after death. Some of these arrangements happen almost automatically when you open accounts or purchase property. Others require deliberate planning and documentation.
Beneficiary Designations
Beneficiary designations are the most common will substitutes. When you open retirement accounts, life insurance policies, or certain bank accounts, you name people to receive those assets when you die. The named beneficiaries receive the assets directly, regardless of what your will says.
Retirement Accounts
IRAs, 401(k)s, 403(b)s, and other retirement accounts pass through beneficiary designations. The institution holding your account distributes funds to your named beneficiaries after receiving a death certificate and claim forms.
Primary beneficiaries receive assets first. If they’ve died before you, contingent or secondary beneficiaries receive the accounts. Without any living beneficiaries, the account typically passes to your estate and goes through probate.
According to the Internal Revenue Service, beneficiary designations on retirement accounts control distribution regardless of will provisions, and updating these designations after major life events prevents unintended consequences.
Life Insurance Policies
Life insurance death benefits pay directly to named beneficiaries. The insurance company sends proceeds to beneficiaries outside probate, usually within weeks of receiving proper documentation.
Policy beneficiaries can be individuals, trusts, charities, or your estate. Naming your estate as beneficiary defeats probate avoidance and may create tax problems. Most people name specific individuals or trusts instead.
Payable-on-Death Bank Accounts
Many banks offer payable-on-death (POD) designations for checking and savings accounts. You maintain complete control during your lifetime, and the account passes to your named beneficiary when you die.
Multiple beneficiaries can share POD accounts equally or in specified percentages. The bank requires death certificates and identification from beneficiaries before releasing funds.
Transfer-on-Death Investment Accounts
Brokerage and investment accounts can have transfer-on-death (TOD) designations. Like POD accounts, you control the investments during life, but they transfer directly to named beneficiaries at death.
TOD designations work well for stocks, bonds, mutual funds, and brokerage accounts. The investment firm retitles assets in the beneficiary’s name after receiving appropriate documentation.
Joint Ownership Arrangements
Property owned jointly with others often passes automatically to surviving co-owners without probate. The type of joint ownership determines what happens when one owner dies.
Joint Tenancy With Right Of Survivorship
This ownership form automatically transfers the deceased owner’s share to surviving joint tenants. Real estate, bank accounts, and investment accounts commonly use this structure.
When one joint tenant dies, survivors continue owning the property without court involvement. The last surviving owner then has full ownership, and the asset passes according to their estate plan.
Joint tenancy works well for married couples but creates complications in other relationships. Adding someone as joint tenant means they own the property immediately, not just at your death. They can access accounts, make decisions, and potentially create liability issues.
Tenancy By The Entirety
Available only to married couples in some states, tenancy by the entirety provides joint ownership with survivorship rights plus protection from individual creditors. Neither spouse can transfer or encumber the property without the other’s consent.
This ownership form offers stronger asset protection than standard joint tenancy. Creditors of only one spouse typically cannot reach property held as tenants by the entirety.
Community Property With Right Of Survivorship
Some community property states allow married couples to hold property as community property with right of survivorship. This provides probate avoidance while maintaining favorable tax treatment of community property.
The surviving spouse receives a full step-up in tax basis on the entire property, not just half. This tax benefit can save substantial capital gains taxes compared to joint tenancy.
Transfer-on-Death Deeds
Many states now allow transfer-on-death deeds for real estate. You record a deed naming a beneficiary who receives the property when you die, but you maintain complete ownership and control during your lifetime.
You can revoke or change the beneficiary anytime before death by recording a new deed. The property doesn’t transfer until death, so it remains yours for selling, refinancing, or any other purpose.
TOD deeds avoid probate but don’t eliminate other considerations. Property passes subject to existing mortgages and liens. Medicaid estate recovery programs may still reach the property in some states.
Not all states recognize transfer-on-death deeds. Check your state’s laws before relying on this approach. Some states have specific form requirements that must be followed exactly.
Vehicle Transfer-on-Death Registrations
Over 30 states allow transfer-on-death designations for vehicle titles. You add a beneficiary designation when registering your vehicle. Upon your death, the beneficiary presents a death certificate to the DMV and receives a new title.
This simple mechanism keeps cars and boats out of probate. The process varies by state, with some allowing multiple beneficiaries and others limiting designations to one person.
Common Pitfalls And Considerations
Coordination Problems
Will substitutes operate independently of your will. If your will says your daughter receives everything but your retirement account names your son as beneficiary, the account goes to your son. The beneficiary designation controls, not the will.
Review all beneficiary designations regularly to confirm they match your current wishes. Life changes like marriages, divorces, births, and deaths should trigger beneficiary updates.
Unintended Disinheritance
Forgotten beneficiary designations can accidentally disinherit people you intended to benefit. An old life insurance policy naming an ex-spouse still pays that person unless you updated the designation after your divorce.
Tax Complications
Multiple beneficiaries on accounts might create unequal tax burdens. Retirement account beneficiaries face income taxes on distributions. Real estate beneficiaries receive property with capital gains tax implications. Unequal asset types can mean unequal after-tax inheritances.
Creditor Issues
Joint accounts with adult children can expose your assets to their creditors, divorces, or lawsuits. Adding someone as joint owner gives them immediate ownership rights you might not intend.
Loss Of Control
Once you add joint owners or make certain transfers, you may lose ability to change course. Joint tenants must agree to property sales or changes. This limits your flexibility.
Strategic Use Of Will Substitutes
The best estate plans typically combine will substitutes with comprehensive wills or trusts. Will substitutes handle specific assets efficiently while your will or trust addresses everything else and provides backup provisions.
Consider the following approaches:
- Use beneficiary designations for retirement accounts and life insurance
- Employ POD/TOD designations for bank and investment accounts
- Maintain joint ownership with spouses on primary residences
- Create trusts for complex situations or minor beneficiaries
- Keep a pour-over will to catch any forgotten assets
Review your will substitutes every few years and after major life events. Marriage, divorce, births, deaths, and changed relationships should prompt immediate reviews. Assets that passed correctly ten years ago might no longer align with your current wishes.
Making Will Substitutes Work For You
Will substitutes offer valuable probate avoidance for many assets, but they require active management. These mechanisms don’t automatically update themselves when your life changes. Taking inventory of all your accounts and their current beneficiary designations creates a clear picture of how your assets will transfer.
We encourage you to list every account, policy, and property you own along with how each is titled and who would receive it at your death. This comprehensive review often reveals outdated designations, unintended consequences, or gaps in your planning. Coordinating will substitutes with your overall estate plan protects your loved ones and honors your true intentions about who should inherit what you’ve built.