Best-Laid Estate Plans: The Unintended Consequences of Non-Probate Transfers

A well-drafted will or trust agreement is central to most estate plans. However, some of the most valuable assets you own may never be controlled by your will at all. Life insurance policies, retirement accounts (like IRAs and 401(k)s), bank accounts with pay-on-death designations, and even real property subject to a transfer on death deed all pass directly to whoever is named as the beneficiary, regardless of what your will says. Similarly, jointly owned assets may be subject to Rights of Survivorship that immediately transfer ownership to one or more surviving owner(s) upon another owner’s death. 

These are called “non-probate transfers,” and under Texas law, they take priority over your will. For example, if your will leaves everything to your spouse but your life insurance policy names your brother as the beneficiary, the insurance proceeds go to your brother. Your will does not override the designation.

Non-probate transfers can be an incredibly useful planning tool, but left unchecked, they can unravel even the most thoughtful estate plan. It’s important to review your beneficiary designations regularly to ensure that they are up-to-date and align with your overall planning goals. 

What Are Non-Probate Transfers?

Non-probate transfers are arrangements that automatically direct property to a named person at your death, separate from your will and outside of the probate process. In Texas, the most common types include:

• Beneficiary Designations on life insurance policies, retirement accounts, and annuities.
• Payable-on-Death (POD) and Transfer-on-Death (TOD) Accounts at banks and brokerage firms. 
• Transfer on Death Deeds for real property. Texas law allows you to sign and record a deed that transfers your interest in real property to a named beneficiary effective at your death. The deed must be recorded before your death and does not affect your ownership, homestead rights, or tax exemptions during your lifetime.
• Property subject to Right of Survivorship, including certain bank accounts and real property. Not all jointly owned property includes a right of survivorship, but such rights can be created by agreement.

How Beneficiary Designations Fall Out of Step

Life changes, but beneficiary forms often do not. Some of the most common situations where designations fall out of alignment with an estate plan include:

• Birth or adoption of a child. A new child may not be included on existing beneficiary forms, which could result in that child receiving nothing from certain accounts.
• Death of a named beneficiary. If a beneficiary passes away before you and you have not updated the designation, the asset may pass in ways you did not intend. There may be a contingent beneficiary who you no longer wish to receive the asset, or there may be no contingent beneficiary at all. In the second scenario, the assets could end up back in your probate estate or be left to your heirs at law.
• New or Updated Trust Planning. Your will or trust agreement may provide for the creation of one or more trusts upon your death.  These trusts may serve several purposes, including asset protection and tax planning. However, non-probate transfers may cause certain assets to bypass these trusts entirely and may defeat the planning you put in place. This is particularly important for any beneficiaries who are minors or incapacitated persons. 

Why This Matters for Your Estate Plan

The core problem is simple: your will and your beneficiary designations can tell two different stories. When they conflict, the beneficiary designation wins every time. No matter how carefully your will or trust is drafted, it cannot override a beneficiary form.

Consider this scenario under Texas law: a parent creates a will leaving everything equally to three children. But the parent’s largest asset, an life insurance policy, still lists only one child as the beneficiary. The result is a deeply unequal distribution that does not reflect the parent’s wishes, and the will cannot fix it.

Now consider a parent whose will creates a trust for minor children, with a trustee named to manage the funds until each child turns 25. The trust provides the children with creditor protection and includes thoughtful provisions about how the money should be spent on education, health, and support. But if the parent’s life insurance policy or retirement account names the children individually as beneficiaries, those assets pass directly to the children, completely outside the trust. Because minors cannot legally own or manage significant property on their own, a court would likely need to appoint a guardian of the estate to manage the funds on the child’s behalf. That guardianship process involves court oversight, ongoing reporting requirements, legal fees, and restrictions on how the money can be used. It is exactly the kind of expensive and cumbersome process that the parent set up the trust to avoid. Additionally, the benefits of the trust would be lost. 

These are not rare or extreme examples. They happen regularly, and almost always result from a failure to update beneficiary designations after a will or trust was put in place. The good news is that these issues are entirely preventable.

Putting Your Plan Back in Sync 

It is good practice to review your beneficiary designations and non-probate assets periodically and whenever there is a major life event such as a marriage, divorce, birth, death, or change in financial circumstances. You should also review this information any time you execute new estate planning documents. Specifically, consider reviewing:

• Life insurance policies
• Employer-sponsored retirement plans and IRAs
• Annuities
• Bank and brokerage accounts with POD or TOD designations
• Any transfer on death deed recorded for your real property

For each one, ask: Does this designation still reflect my wishes? Does it work together with my will or trust?

Keeping your beneficiary designations current is one of the simplest and most effective things you can do to protect your family and ensure that your estate plan works the way you intend.  If you have questions about your beneficiary designations or would like to discuss how they fit within your broader estate plan, consider reaching out to an experienced estate planning attorney who can help you review your designations and make sure everything is working together.

This newsletter is for informational purposes only and does not constitute legal advice. For guidance specific to your situation, please consult with a qualified attorney.