Most people, whether or not they have done estate planning, are aware of how beneficiary designations work. After all, beneficiary designations can be used on bank accounts, life insurance policies, retirement accounts, and many other types of financial and investment assets to automatically transfer those assets on death. However, I have found that very few people are aware that there is also a “beneficiary designation” approach available to business interests.
I am referring to the Uniform TOD Security Registration Act, which is part of the Michigan Estate and Protected Individuals Code. “TOD” is an acronym for “transfer on death”, and the TOD Act permits “securities” (defined broadly to include stocks, bonds, accounts with financial institutions, and ownership interests in a business) to be registered in “beneficiary form”. Beneficiary form means a registration of a security that indicates the present owner of the security and the owner’s designation of who will become the security’s owner upon the owner’s death. On the death of the owner, ownership of the security registered in beneficiary form passes to the designated beneficiary (e.g. spouse, children, owner’s trust, etc.) once proof of death is given to the registering entity and any other requirements are fulfilled.
Granted, the ideal approach with transferring a business interest is to retitle it in the name of the owner’s beneficiaries. But that task is often difficult considering that death can occur unexpectedly, and even if it is foreseeable, transferring ownership of a business interest (particularly small, owner-operated businesses) can be easy to overlook. So by using a TOD registration, the owner of a business can be sure that it will transfer outside of probate while also maintaining the same level of ownership and control over the business, as the beneficiary’s rights do not arise until the death of the owner.
If TOD registration is something that you are interested in, please do not hesitate to contact us. And remember that even if your business is not the type that would continue following your death, TOD registration could still be an important mechanism to ensure that the economic benefits of your business interest pass immediately to your spouse, trust, etc. and do not get tied up for an indefinite amount of time in the probate process.