Bypass Probate with a Directed Beneficiary Arrangement

Due to recent legislation, there's now a way in some states that makes it possible to transfer your stock, bond, and mutual fund assets directly to your beneficiaries outside of probate and without the necessity of a trust or will. You can designate beneficiaries for any one or more of your individual or joint non-retirement accounts that are held by a securities broker or mutual fund company which offers a Directed Beneficiary Arrangement (DBA), regardless of your state of residence. Upon your death (or the death of the last surviving joint owner, if your accounts are jointly registered), ownership of these accounts will be transferred directly to the beneficiaries that you specify – avoiding probate and without the formalities and expense of a trust.

Under a DBA, you retain complete lifetime control over your accounts. Your designated beneficiaries have no rights to the accounts until after your death or the death of the last surviving owner. You can also change your beneficiaries or revoke the arrangement at any time simply by writing to the mutual fund or broker.

The way that DBA-covered accounts are taxed remains the same; they're taxed in the same manner as accounts not covered by a DBA. You remain subject to current income tax on any earnings, and the accounts will generally also be subject to estate tax upon your death. You should incur no gift taxes as a result of the arrangement, because the beneficiary is changeable at any time.

Probate, the court-supervised process of collecting and distributing a person's property after death, can be a financially- as well as emotionally burdensome ordeal. There are three unfortunate consequences of having your assets probated under the jurisdiction of the court: first, probate is time-consuming. According to a survey of attorneys across the country, the time required to probate a will can range up to five years.

Second, probate attracts unwanted publicity. Private matters become public headlines. Also, from probate court records, lists of widowed spouses are compiled and sold to unscrupulous individuals who prey on beneficiaries to scam them out of their money.

Third, probate can be quite costly. In the case of very small estates ($10,000 to $20,000), it can average 20 percent. On somewhat larger estates in the $100,000 range, expenses can run about 10 percent. For larger estates, the percentages charged are smaller, but the amounts taken can be very large.

It can be very much to your advantage to avoid the time, publicity, and expense involved in the probate process. The main advantage of a DBA is its simplicity, but it is not meant to be a substitute for a comprehensive estate plan. A DBA allows you to transfer assets directly to your chosen beneficiaries simply by completing a short form. However, unlike a will or trust, the DBA does not permit you to impose special terms or conditions on the way in which your beneficiaries receive and use those assets, nor does it enable you to take advantage of sophisticated estate-planning techniques that could substantially reduce the burden of taxes on your estate.

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