What Is a POD Account?

Also called a “POD” account, a payable on death account can be created at a bank or credit union and is transferable without probate at your death to the person you name.  We frequently utilize these types of accounts as part of a larger, comprehensive estate plan.  So, I wanted to provide some information about what these accounts are and how to use them.

Sports Grind Entertainment’s recent article entitled “Payable on Death (POD) Accounts” explains that there are different reasons for including a payable on death account in your estate plan. You should know how they work and very critically, how it works with your greater estate plan, 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.

We often utilize POD account designations so that bank accounts can be transferred to a trust upon death.  This is provides for bank accounts to avoid probate on an account while still directing the assets to a trust which spells out your wishes for your assets.  This avoids the need to close and open new accounts in many situations.

One thing I would stress however, is that many people suggest POD accounts as a way to avoid probate so that an estate plan is not necessary.  Without elaborating, every case in which I’ve ever encountered this has been a disaster.  A POD account is not an estate plan substitute, it is a tool in the tool box.

Similarly, bankers often suggest these accounts to clients as a probate avoidance tool.  That has it’s merits of course, but what if you are using a will-based estate plan?  If so, adding beneficiaries actually removes these accounts from your estate plan, and often creates problems for the executor or beneficiaries.

If you are interested in creating a payable on death account, the first step is to review your estate plan and talk to your estate planning attorney about the effect such an account will have on your assets.

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

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What is the right kind of Financial Power of Attorney for You?

A June 2020 Transamerica Center for Retirement Studies survey showed that a mere 28% of retirees have a financial power of attorney (POA)—and many people don’t understand that there are two types of financial powers of attorney that serve different purposes.

MarketWatch recently published an article “Does your estate plan use the right type of Power of Attorney for you?” that says knowing how both types work is crucial in the pandemic, especially in the event that you get sick with coronavirus.

A Durable Financial Power of Attorney can be either “springing” or “immediate.” “Durable” refers to the fact that this Power of Attorney will endure after you have lost mental or physical capacities, whether temporary or permanent. It lists when the powers would be granted to the person of your choosing and the powers end at your death.

An “immediate” Financial Power of Attorney is effective as soon as you sign the document. In contrast, a “springing” POA  means it is only effective when you cannot manage your own financial affairs, usually based upon the written opinion of two physicians.

Therefore, to begin paying your bills, your agent must have written proof of from the physicians, and he or she doesn’t automatically have the authority to ask for them.  When issues, such as doctors’ letters, are required before the agent you chose can serve you, ask your estate planning attorney for guidance.

An obstacle that requires a Durable Financial Power of Attorney can come upon you very fast and possibly include you and your spouse at the same time. For example, you may both become ill, or one could become ill and the other is absorbed in caring for their spouse.

The powers granted by a typical Financial POA are often broad and permit selling and buying assets; managing your debt, car and Social Security payments; filing your tax returns; and caring for any assets not named in a trust you may have, such as your IRA.

If you recover your capacity, your agent must turn everything back over to you when you ask.

Remember that your power of attorney documents are only as good as the people who implement them. You should also make certain anyone named knows that they’ll have the job, if needed. They must know where to find your POA and all other important information.  If you aren’t sure of the type of POA you currently have, it is worth checking as part of an estate plan update.  See our recent article for when it might be time to do that!  https://www.galliganmanning.com/when-to-update-your-estate-plan/ 

Reference: MarketWatch (Oct. 9, 2020) “Does your estate plan use the right type of Power of Attorney for you?”

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What’s the Best Way to Go with Loans to Family?

Loans to family must be treated like real, enforceable loans to third parties if you don’t want to run afoul of gift and estate tax.

Loans are a terrific way for parents to foster a child’s independence, encourage responsibility and signal their confidence that their child can succeed on their own.  They also don’t use any of your lifetime gift tax exemption ($11.58 million per person).  But, loans to family highlight some important tax and family concerns you should be aware of.

Kiplinger’s recent article entitled “Gifts vs. Loans: Don’t Be Generous to a Fault” tells the story of Mary Bolles. The case illustrates that parents’ actions and expectations as to repayment of the loan can recharacterize the “loan” to a taxable “gift.” That can mean unintended gift tax consequences. Mary was the mother of five who made numerous loans to each of her children. She kept copious records of each loan and any repayments. Between 1985 and 2007, she loaned her son Peter about $1.06 million to support his business ventures — despite the fact that it soon was clear he wouldn’t be able to make any more payments on the loans. None of the loans to Peter was ever formally documented, and Mary never tried to enforce the collection of any of the loans.

In late 1989, Mary created a revocable living trust, which specifically excluded Peter from any distribution of her estate when she died. While she later amended her trust to no longer exclude him, she included a formula to account for the “loans” he received in making distributions to her children. After her death, the IRS said that the entire amount of the loans, plus accrued interest, was part of her estate. They assessed the estate with a tax deficiency of $1.15 million.  The estate said the entire amount was a gift.

At trial, the court considered the factors to be weighed in deciding whether the advances were loans or gifts. Noting that the determination depends not only on how the loan was structured and documented, the court also explained that in the case of a loan to family, a major factor is whether there was an actual expectation of repayment and intent to enforce the debt.

The court compromised and held that any advances prior to 1990 were loans (about $425,000), since the evidence suggested that Mary reasonably expected that Peter would repay the loans, until he was disinherited from her trust in late 1989. The court said that the money given to Peter after he was disinherited — from 1990 onward — were gifts.

The decision shows that if you’re considering taking advantage of the elevated gift tax exemption before it sunsets, review any outstanding family loan transactions. You should see the extent to which those loans may have been transmuted into gifts over the years—which may adversely impact the amount of your remaining available exemption. The safest way to do this would be to consult an experienced estate planning attorney, who can help you safely navigate these complex rules.

When making a gift there are other considerations.  If you will make such a loan, treat it as such.  Have a lawyer prepare a loan agreement.  Create a reasonable expectation that the loan will be repaid and that you’ll enforce it.  This isn’t just for tax reasons, it is to maintain family harmony.  Giving a “loan” to one child may not sit well with the others, so make sure it is honored.  You should also consider the impact this will have on state taxes, income taxes, and long-term care planning if relevant to you.

To be safe, follow these simple steps:

  1. Document the loan transaction between the lender and borrower.
  2. Charge interest based on the government rates (AFR), which are published monthly.
  3. Make sure the borrower will have enough net worth to likely repay the loan.
  4. Get a copy of the borrower’s financial statement.
  5. If the loan sets out periodic payments, make certain these are made on time.
  6. Report the interest income you receive from the borrower on your income tax return.

Make sure that you do any intra-family loans properly to avoid any future issues.

Reference: Kiplinger (Oct. 7, 2020) “Gifts vs. Loans: Don’t Be Generous to a Fault”

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