When it comes to estate planning, it’s easy to opt for the fastest, simplest and cheapest path forward. Sometimes that includes using transfer on death (TOD) or payable on death (POD) account registrations to avoid probate and other expenses. However, there are some major pitfalls to this account registration strategy. We review the pros and cons of transfer on death accounts.
What Is A Transfer On Death / Payable On Death Account?
A transfer on death (TOD) account is a type of beneficiary designation that names recipient beneficiaries to receive the assets of the account at the time of the account holder’s death, without the assets going through probate. You can name one or more recipients who receive the assets outright through direct distribution from your account. A payable on death (POD) account is very similar to a TOD arrangement but deals with a person’s bank assets instead of their stocks, bonds, mutual funds or other investment assets.
What Are The Benefits (Pros) of a Transfer On Death / Payable On Death Account?
Free To Implement
Virtually every bank and financial institution offers this type of account registration, with naming of beneficiaries on an account. These accounts can be established free of charge at most institutions.
Easy To Administer
Just like naming and changing beneficiary designations on your retirement account or life insurance policy, such changes are easy to implement on TOD or POD accounts. All you need to do is complete new paperwork with the financial institution. There’s no appointment with an attorney or time involved other than completing a form.
Immediate Transfer of Assets to Named Recipients
Rather than waiting for assets to pass through probate or estate administration, assets should be transferred to named beneficiaries on TOD and POD accounts within a short timeframe post submitting necessary paperwork such as a death certificate and recipient beneficiary account information.
What Are the Pitfalls (Cons) of a Transfer On Death / Pay On Death Account?
Lack of Resources To Pay Final Expenses
Death sadly includes expenses such as paying your final bills, paying for either burial or cremation, paying your final tax payments, etc. A significant downfall with relying upon TOD or POD account registration to administer your assets upon death is that there might not be remaining assets in your estate to cover such expenses.
If there are other assets outside of your TOD or POD accounts that will remain as part of your estate or Trust, perhaps sufficient assets will be available to administer your final affairs. However, if all of your assets pass by virtue of beneficiary designation, there could be a shortfall to cover your final financial affairs.
Possible Unintended Expenses Incurred by Your Executor, Trustee or Court Appointed Representative
If the person administering your affairs is the sole recipient of your assets, then perhaps there’s not a problem if he or she will assume responsibility to cover final expenses from the assets he or she receives from you.
However, if you name more than one recipient you need to consider:
o Who will bear the responsibility for your final expenses?
o Will he or she receive additional resources to help cover such expenses as compared to other named beneficiaries who won’t bear such expenses?
o Will the named beneficiaries of your account(s) work together to help pay bills, even though they may not share the same legal and financial responsibilities?
If you have any hesitation about the above, an important question to ask yourself is if the person who will be responsible for your final affairs might incur unintended expenses as a result of administering your estate and final affairs.
For example, assume you have two children, and that you name each child as fifty percent beneficiaries on all of your accounts and life insurance. Assume you also name only one child as the executor of your Will and your estate. The child named as the executor legally assumes your final financial obligations, which can be significant just for cremation or burial, let alone any other expenses.
You Cannot Name an Alternate or Contingent Beneficiary
If the person you nominated to receive the proceeds dies before you, then the contents of your account are automatically transferred to your estate.
Some States Only Permit an Equal Distribution of Funds in a POD Account
As a general rule, a payable on death account can have more than one beneficiary. However, if the account holder wants each beneficiary to receive unequal portions of the assets in the account, they must check that their state laws allow it.
If you have concerns about administering your assets solely by beneficiary designations, other planning solutions include:
Give an Extra Amount to the Person Responsible for Your Affairs
You could opt to allocate a larger amount to the person who will be responsible for administering your financial affairs post death. This could be achieved by virtue of allocating a larger percentage to that person or naming separate accounts to transfer to that individual.
However, an important planning note is that once assets transfer to a named beneficiary or joint account holder, the recipient might not be financially required to fulfill your final obligations. If he or she refuses to do so, court actions could be involved.
Allow Some Residual Amount to Be Included in Your Estate
Perhaps one of the easiest solutions is to allow some amount of remaining assets to be included in your estate and subject to probate. Some expenses would be incurred, but necessary resources would be available to administer your final expenses.
Establish A Revocable Trust
If you truly want to avoid probate and any public financial disclosures, while protecting the ability to administer your final affairs, consider establishing and funding a Revocable Living Trust. This instrument allows assets held in the Trust to pass free of probate while attending to your final wishes and financial provisions, as well as ultimate bequests to your loved ones.
SageVest Wealth Management counsels clients on the totality of considerations pertaining to their investment accounts and broader financial affairs. We strongly encourage consulting an attorney regarding estate planning considerations, and we frequently participate in such discussions and follow-up actions on a complimentary basis for our clients. We care about instituting the best planning techniques to achieve your needs and objectives during your lifetime, while protecting the best interests of your loved ones longer term. Please contact us with any questions about devising the most appropriate assets and planning structure for you.