Trust provides more Protection than TOD

January 6, 2022

Many people incorporate a TOD, or “Transfer on Death” into their financial plan, thinking it will be easier for their loved ones than creating a trust. However, a trust provides more protection than a TOD. The article “TOD Accounts Versus Revocable Trusts—Which Is Better?” from Kiplinger explains how it really works.

The TOD account allows the account owner to name a beneficiary on an account who receives funds when the account owner dies. The TOD is often used for stocks, brokerage accounts, bonds and other non-retirement accounts. A POD, or “Payable on Death,” account is usually used for bank assets—cash.

The chief goal of a TOD or POD is to avoid probate. The beneficiaries receive assets directly, bypassing probate, keeping the assets out of the estate and transferring them faster than through probate. The beneficiary contacts the financial institution with an original death certificate and proof of identity. The assets are then distributed to the beneficiary. Banks and financial institutions can be a bit exacting about determining identity, but most people have the needed documents.

There are pitfalls. For one thing, the executor of the estate may be empowered by law to seek contributions from POD and TOD beneficiaries to pay for the expenses of administering an estate, estate and final income taxes and any debts or liabilities of the estate. If the beneficiaries do not contribute voluntarily, the executor (or estate administrator) may file a lawsuit against them, holding them personally responsible, to get their contributions.

If the beneficiary has already spent the money, or they are involved in a lawsuit or divorce, turning over the TOD or POD assets may get complicated. Other personal assets may be attached to make up for a shortfall.

If the beneficiary is receiving means-tested government benefits, as in the case of an individual with special needs, the TOD or POD assets may put their eligibility for those benefits at risk.

These and other complications make using a POD or TOD arrangement riskier than expected.

A trust provides a great deal more protection for the person creating the trust (grantor) and their beneficiaries than a TOD. If the grantor becomes incapacitated, trustees will be in place to manage assets for the grantor’s benefit. With a TOD or POD, a Power of Attorney would be needed to allow the other person to control of the assets. The same banks reluctant to hand over a POD/TOD are even more strict about Powers of Attorney, even denying POAs, if they feel the forms are out-of-date or don’t have the state’s required language.

Creating a trust with an experienced estate planning attorney allows you to plan for yourself and your beneficiaries. You can plan for incapacity and plan for the assets in your trust to be used as you wish. If you want your adult children to receive a certain amount of money at certain ages or stages of their lives, a trust can be created to do so. You can also leave money for multiple generations, protecting it from probate and taxes, while building a legacy. If you would like to read more about a TOD or POD, and how they work, please visit our previous posts.

Reference: Kiplinger (Dec. 2, 2021) “TOD Accounts Versus Revocable Trusts—Which Is Better?”

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TOD and POD Accounts are ways to avoid Probate

December 28, 2021

Kiplinger’s recent article entitled “TOD Accounts Versus Revocable Trusts – Which Is Better?” explains that a TOD account typically deals with distributing stocks, brokerage accounts or bonds to the named beneficiary, when the account holder dies. A POD account is similar to a TOD account. However, it handles a person’s bank assets (cash), not their securities. Both TOD and POD accounts are quick and simple ways to avoid probate.

That can be slow, expensive, public and possibly messy. Financial institutions offer TOD and POD at their discretion, but almost all major brokerage houses and investment houses now have these types of accounts, as well as most banks for standard bank accounts. Many even let you handle this online.

The big benefit of using a POD or TOD account is probate avoidance. As mentioned, TOD and POD accounts avoid the probate process, by naming a beneficiary or beneficiaries to inherit the asset directly when the account owner passes away. These accounts can distribute assets quickly and seamlessly to the intended beneficiary.

However, when someone passes away, there can be creditors, expenses of administering the decedent’s estate and taxes owed. The person or persons responsible for administering the decedent’s estate are typically empowered under the law to seek contributions from the POD and TOD beneficiaries to pay those liabilities. If the beneficiaries don’t contribute voluntarily, there may be no choice but to file a lawsuit to obtain the contributions. The beneficiary may also have spent those assets or have other circumstances, such as involvement in a lawsuit or a divorce. Consequently, these situations will complicate turning over those assets.

A trust lets you to plan for incapacity, and if the creator of the trust becomes incapacitated, a successor or co-trustee can assume management of the account for the benefit of the creator. With a POD or TOD account, a durable power of attorney would be required to have another person handle the account. Note that financial institutions can be reluctant to accept powers of attorney, if the documents are old or don’t have the appropriate language.

A trust allows you to plan for your beneficiaries, and if your beneficiaries are minors, have special needs, have creditor issues, or have mental health or substance abuse issues, trusts can hold and manage assets to protect those assets for the beneficiary’s use. Inheritances can also be managed over long periods of time with a trust.

Although in some cases POD and TOD accounts are ways to avoid probate, their limitations at addressing other issues can cause many individuals to opt for a revocable trust. Talk to an experienced estate planning attorney to see what’s best for you and your family. If you are interested in learning more about avoiding probate, please visit our previous posts.

Reference: Kiplinger (Dec. 2, 2021) “TOD Accounts Versus Revocable Trusts – Which Is Better?”

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What a Will Can and Cannot Do

November 18, 2021

Everyone needs a will. A last will and testament is how an executor is named to manage your estate, how a guardian is named to care for any minor children and how you give directions for distribution of property. However, not all property passes via your will. You’ll want to know what a will can and cannot do, as well as how assets are distributed outside of a will. This was the topic of “The Legal Limits of Your Will” from AARP Magazine.

Retirement and Pension Accounts

The beneficiaries named on retirement accounts, including 401(k)s, pensions, and IRAs, receive these assets directly. Some states have laws about requiring spouses to receive some or all assets. However, if you don’t keep these beneficiary names updated, the wrong person may receive the asset, like it or not. Don’t expect anyone to willingly give up a surprise windfall. If a primary beneficiary has died and no contingency beneficiary was named, the recipient may also be determined by default terms, which may not be what you have in mind.

Life Insurance Policies.

The beneficiary designations on an insurance policy determine who will receive proceeds upon your death. Laws vary by state, so check with an estate planning attorney to learn what would happen if you died without updating life insurance policies. A simpler strategy is to create a list of all of your financial accounts, determine how they are distributed and update names as necessary.

Note there are exceptions to all rules. If your divorce agreement includes a provision naming your ex as the sole beneficiary, you may not have an option to make a change.

Financial Accounts

Adding another person to your bank account through various means—Payable on Death (POD), Transfer on Death (TOD), or Joint Tenancy with Right of Survivorship (JTWROS)—may generally override a will, but may not be acceptable for all accounts, or to all financial institutions. There are unanticipated consequences of transferring assets this way, including the simplest: once transferred, assets are immediately vulnerable to creditors, divorce proceedings, etc.

Trusts

Trusts are used in estate planning to remove assets from a personal estate and place them in safekeeping for beneficiaries. Once the assets are properly transferred into the trust, their distribution and use are defined by the trust document. The flexibility and variety of trusts makes this a key estate planning tool, regardless of the value of the assets in the estate.

Take the time to sit down with an experienced estate planning attorney who help you understand the limitations of what a will can and cannot do. If you would like to read more about wills and how they are structured, please visit our previous posts.

Reference: AARP Magazine (Sep. 29, 2021) “The Legal Limits of Your Will”

Handwritten Will can be a Serious Mistake

June 16, 2021

A holographic, or handwritten, will might sound like a nice, simple way to address your estate when you pass. Yet, a handwritten will can be a serious mistake. Some states, recognize holographic wills under limited circumstances, such as Alaska, Arizona, Arkansas, California, Colorado, Idaho, Kentucky, Louisiana, Maine, Michigan, Mississippi, Montana, Nebraska, Nevada, New Jersey, North Carolina, North Dakota, Oklahoma, Pennsylvania, South Dakota, Tennessee, Texas, Utah, Virginia, West Virginia and Wyoming.

In some of these states, if a will was handwritten by its maker, the state will recognize the will provided it was executed with the state’s requirements for valid wills.

Many states, require, among other things, that at least two witnesses attest and sign the will in the presence of each other, as well as in the presence of the maker.

Think Advisor’s May 20 article entitled “Relying on Holographic Wills Is a Terrible Idea” says that, while a holographic will could be valid in your state, there are many instances where attempts to comply with the state probate laws failed.

If the maker of a holographic will lives in a state that doesn’t accept holographic wills, the will isn’t valid.

In those cases, if there aren’t any valid prior wills, the testator’s property will be distributed to his or her heirs according to state intestacy law, rather than the intent of the testator.

This makes it problematic for someone who makes a holographic will. That is because the maker of the will intended for the assets to pass in a certain way, and perhaps not how the state’s laws say.

Some people are not too concerned with making a will. However, that may be a result of a person not having many assets, or the individual relying on will alternatives, like intestacy laws, joint bank accounts, payable or transfer on death accounts, and certain deeds, such as real property owned tenancy by entirety (property owned by a married couple).

Some states also have what is known as a lady bird deed, or an enhanced life estate deed. This document permits the owner of the real property to have control of the property, until he or she dies. The property is then transferred automatically to the person(s) named in the deed. It’s essentially a lady bird deed as being a pay-on-death account for real estate.

A handwritten will can be a serious mistake with consequences for your loved ones that could last for years. Avoid this potential crisis by talking to an experienced estate planning attorney.

If you would like to learn more about drafting a will, please visit our previous posts.

Reference: Think Advisor (May 20, 2021) “Relying on Holographic Wills Is a Terrible Idea”

Short-Cuts in Planning can have Consequences

June 15, 2021

It seems like a simple way for the children to manage mom’s finances: add the grown children as owners to a bank account, brokerage account or make them joint owners of the home. However, these types of short-cuts in planning can have consequences for the parent’s estate and the children themselves, says the article entitled “Estate planning: When you take the lazy way out, someone will pay the price” from Florida Today.

By adding an adult child as owner to the account, the child is being given 50% ownership. The same is true if the child is added to the title for the home as joint owner. If there is more than $30,000 in the account or if the asset is valued at more than $30,000, then the mother needs to file a gift tax return—even if no gift tax is due. If the gift tax return is not filed in a timely manner, there might be a gift tax due in the future.

There is also a carryover basis in the account or property when the adult child is added as an owner. If it’s a bank account, the primary issue is the gift tax return. However, if the asset is a brokerage account or the parent’s primary residence, then the child steps into the parent’s shoes for 50% of the amount they bought the property for originally.

Here is an example: let’s say a parent is in her 80s and you are seeing that she is starting to slow down. You decide to take a short-cut and have her add you to her bank account, brokerage account and the deed (or title) to the family home. If she becomes incapacitated or dies, you’ll own everything and you can make all the necessary decisions, including selling the house and using the funds for funeral expenses. It sounds easy and inexpensive, doesn’t it? It may be easy, but it’s not inexpensive.

Sadly, your mom dies. You need some cash to pay her final medical bills, cover the house expenses and maybe a few of your own bills. You sell some stock. After all, you own the account. It’s then time to file a tax return for the year when you sold the stock. When reporting the stock sale, your basis in the stock is 50% step-up in value based on the value of the stock the day that your mom died, plus 50% of what she originally paid for the stock.

If your mom bought the stock for $100 twenty years ago, and the stock is now worth $10,500, when you were added to the account, you now step into her shoes for 50% of the stock—$50. You sold the stock after she died, so your basis in that stock is now $5,050—that’s $5,000 value of stock when she died plus $50: 50% of the original purchase. Your taxable gain is $5,450.

How do you avoid this? If the ownership of the brokerage account remained solely with your mother, but you were a Payable on Death (POD) or Transfer on Death (TOD) beneficiary, you would not have access to the account if your mom became incapacitated and had appointed you as her “attorney in fact” on her general durable power of attorney. What would be the result? You would get a step-up in basis on the asset after she died. The inherited stock would have a basis of $10,000 and the taxable gain would be $500, not $5,450.

Short-cuts in planning can have dire consequences for your loved ones. A better alternative—talk with an estate planning attorney to create a will, a revocable trust, a general durable power of attorney and the other legal documents used to transfer assets and minimize taxes. The estate planning attorney will be able to create a way for you to get access or transfer the property without negative tax consequences.

If you would like to read more about poor estate planning mistakes, please visit our previous posts.

Reference: Florida Today (May 20, 2021) , “Estate planning: When you take the lazy way out, someone will pay the price”

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Including a POD Account in your Estate Plan

May 25, 2021

Also called a “POD” account, a payable on death account can be created at a bank or credit union and is transferrable without probate at your death to the person you name. Sports Grind Entertainment’s recent article entitled “Payable on Death (POD) Accounts” explains that there are different reasons for including a POD account in your estate plan. You should know how they work, when deciding whether to create one. Talk to an experienced estate planning attorney who can help you coordinate your investment goals with your end-of-life wishes.

The difference between a traditional bank account and a POD account is that a POD account has a designated beneficiary. This person is someone you want to receive any assets held in the account when you die. A POD account is really any bank account that has a named beneficiary.

There are several benefits with POD accounts to transfer assets. Assets that are passed to someone else through a POD account are not subject to probate. This is an advantage if you want to make certain your beneficiary can access cash quickly after you die. Even if you have a will and a life insurance policy in place, those do not necessarily guarantee a quick payout to handle things like burial or funeral expenses or any outstanding debts that need to be paid. A POD account could help with these expenses.

Know that POD account beneficiaries cannot access any of the money in the account while you are alive. That could be an issue if you become incapacitated, and your loved ones need money to help pay for medical care. In that situation, having assets in a trust or a jointly owned bank account could be an advantage. You should also ask your estate planning attorney about a financial power of attorney, which would allow you to designate an agent to pay bills and the like in your place.

If you are interested in including a payable on death account in your estate plan, the first step is to talk to your bank to see if it is possible to add a beneficiary designation to any existing accounts you have, or if you need to create a new account. Next, decide who you want to add as a beneficiary.

If you would like to learn more about POD accounts and other banking issues related to estate planning, please visit our previous posts.

Reference: Sports Grind Entertainment (May 2, 2021) “Payable on Death (POD) Accounts”

Category: POD

Trust provides more Protection than TOD

TOD and POD Accounts are ways to avoid Probate

What a Will Can and Cannot Do

Handwritten Will can be a Serious Mistake

Short-Cuts in Planning can have Consequences

Photo by Brett Jordan from Pexels

Including a POD Account in your Estate Plan

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