Transfer on Death accounts can be used wisely or poorly.
When it comes to passing inheritances to heirs, there are a variety of options.
Most commonly, people think of using a last will and testament or a revocable living trust (RLT).
Fewer people initially think of transfer on death (TOD) designations, or payable on death (POD) designations.
For simplicity sake, when I use TOD and POD in this post, I am including beneficiary designations as commonly used to transfer life insurance, qualified retirement accounts, and annuities.
According to a recent mondaq article titled “Transfer-on-Death Designations: A Word of Warning,” it is best to incorporate these within the context of a comprehensive estate plan.
Why is it often helpful to use POD or TOD accounts?
The administrator of the account and the beneficiaries of the account do not have to wait on probate to complete the transfer.
Additionally, the process of naming beneficiaries is fairly simple.
Often these beneficiary forms are provided when the account is open and are easy to update thereafter.
Unlike inheritance changes in a last will or RLT, no attorney and legal fees are required.
And what is not to like about that?
Even so, they can cause problems without careful thought or attention to your comprehensive estate plan.
TOD/POD designations remove assets from the probate estate.
Assets with TOD or TOD beneficiary designations do not pass to probate if beneficiaries are named.
For those people who expect all assets to be distributed as directed in their last will or RLT, this can be a problem.
If Dick and Jane are inheriting equal shares under the last wills of their parents, but Dick is the sole TOD or POD beneficiary on the big old brokerage account of their folks, then Jane may be “one fry short of a Happy Meal,” as we used to say back in the day!
Her expectation of one-half of the inheritance will not be met.
Discussing all assets with an experienced estate planning attorney can help the last will or RLT and these TOD or POD accounts to work together.
TOD/POD designations impact tax planning.
A variety of tools and strategies can be implemented to reduce taxes around the transfer of property after death.
Some people choose to use marital trusts, credit shelter trusts, or generation-skipping transfer trusts.
If you have any of these as part of your estate planning, you should know POD or TOD accounts may undermine your use of these strategies.
By naming an individual as the POD or TOD beneficiary rather than the trust, the assets will not pass to the trust as outlined in the estate plan.
As a result, you could have unused tax exemptions.
TOD/POD designations can create liquidity problems in an estate.
TOD and TOD accounts tend to be financial accounts.
As a result, they are the most liquid assets.
When only assets like business interests or real estate are held by the estate, the estate may lack the funds to pay the taxes or expenses associated with settling an estate.
In these instances, property may need to be sold or the executor may be required to recover funds from the beneficiaries of the POD or TOD accounts.
TOD/POD designations can undermine changes made to an estate plan.
Life is full of changes.
After all, change seems to be one of the only constants in life (tip of the hat to Heraclitus there).
Often the nature of relationships or general life circumstances may require a change to estate planning.
When people update their last wills and RLTs, they often overlook updates to their TOD or POD accounts.
This is especially true if the estate planning attorney is not informed of any asset titling and retitling.
When the beneficiary designations are not updated, the “wrong people” can inherit the assets.
In my example above regarding the inheritance of Dick and Jane, it would be helpful for their parents to have reviewed the title and beneficiary designations for all of their assets from time to time.
Unfortunately, a goodly number of the incoming phone calls we take are from “Janes” who want to challenge the unequal inheritance based on the contrary provisions in last wills.
First, I do no estate or trust litigation, so I refer such matters on to attorneys who do.
In fact, I have not been in a courtroom since 1989, and that was in W. Germany while in the JAG Corps!
Second, I warn these “Janes” that the fight will be uphill since title and beneficiary designations trump the provisions of estate planning legal documents whenever in conflict.
Although TOD and POD designations can be helpful options for financial accounts, they can also work in opposition to your comprehensive estate plan if not included in your work with an experienced estate planning attorney.
Reference: mondaq (March 15, 2023) “Transfer-on-Death Designations: A Word of Warning”