When it comes to estate planning, a person has different options to choose from, depending on their priorities and financial situations. For example, one whose goal is to avoid probate will adopt a probate-avoiding plan such as a revocable trust. Ultimately, the right estate plan would depend on a person’s unique financial situations.

For those who don’t have a lot of assets and only have monetary accounts like bank accounts, life insurance, IRAs, or 401(k)s, listing a pay-on-death beneficiary is the ideal option. What happens here is that the account owner names some people who they want the contents of the account to go to when they pass away.

Although having pay-on-death beneficiaries is highly recommended for the swift transfer of money without the need for probate, there are some things that need to be considered. There are two instances when pay-on-death beneficiaries should NOT be listed.

1. If there are more than 4 beneficiaries

Money accounts in banks, life insurance policies, IRAs, and other similar accounts are treated differently from wills and other estate planning documents. The pay-on-death beneficiary set up only works favorable when a maximum of 4 adults are listed. If an account holder has 13 or 14 beneficiaries, this can pose problems and may not even be accepted by the financial institution.

If a person has this many beneficiaries that they want to give money to when they pass, they should look at other options. It may be more ideal for them to create a revocable trust, which is a family entity that can have this quantity of beneficiaries. The revocable trust offers the same swift transfer benefits, while also avoiding the probate process.

2. If the beneficiaries are minors

Another instance when pay-on-death beneficiaries should not be named in accounts is if the beneficiaries are minors. Minors do not have the capacity to enter into contractual assignments, let alone affix their signatures in a bank account. Hence, they will not be able to claim their inheritance until they reach legal age.

If the money is to be used for their upbringing, they will need to go to court to appoint a conservatorship, which is basically the same as going to probate. This defeats the entire purpose of having a pay-on-death beneficiary.

Should a person intend that the money be divided among minors, it’s much better to create a revocable trust where they have the capacity to name guardians who can manage the money for the minors. This benefit is not available in a pay-on-death beneficiary designation.

While listing a pay-on-death beneficiary is recommended to make the transfer of money upon death easy and immediate, there are limitations to this benefit. If a person has dozens of beneficiaries or wants to list minors in their accounts, they should look for and evaluate other estate planning methods that suit their goals and priorities.