Do TOD Accounts Mean I Don’t Need an Estate Plan?

Many people incorporate a TOD, or “Transfer on Death” into their financial plan, thinking it will be easier for their loved ones because it will avoid probate.  They often do this at the suggestion of bankers or financial professionals, and they believe it avoids the need for having a trust or even a will.  However, 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, and is akin to having a beneficiary named on the account.  It’s worth pointing out that I’m using TOD as a general term here, the specific term might be different for different types of assets.  For example, a POD, or “Payable on Death,” account is usually used for bank assets—cash.  You can find more information about pitfalls of beneficiary designations here.  https://www.galliganmanning.com/common-mistakes-made-on-beneficiary-designations/ 

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/POD assets may get complicated. Other personal assets may be attached to make up for a shortfall.

Very frequently, naming a TOD/POD beneficiary in an estate that otherwise expects to go through probate (i.e. a will-based estate plan) leads to having non-liquid assets such as a house which cost money to administer, and no money with which to do so.

If the beneficiary is receiving means-tested government benefits, as in the case of an individual with special needs, the TOD/POD assets may put their eligibility for those benefits at risk.  This is a very, very common problem when a loved one has a disability.

Very simply too, beneficiaries under TOD/POD accounts can predecease an owner with no meaningful way to handle contingencies.  If that happens, the asset will be subject to probate which will negate their advantage, and may not go to the proper beneficiaries.  Utilizing trusts can solve that problem.

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

A trust provides more benefit to the trustor (creator of the trust) and in fact can work in conjunction with TODs as part of a complete, integrated plan.  Trusts address control of assets upon incapacity because trustees will be in place to manage assets for the trustor’s benefit. With a TOD/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.  People often don’t think of trusts as part of incapacity planning, but this is often a benefit to a trust-based plan.

Similarly, trusts (whether an asset named the trust as beneficiary of a TOD/POD or if it owns the assets themselves) can address contingencies.  So, if a beneficiary has a disability, potential divorce, creditors, predeceases the owner, or virtually any other reason for them not to directly receive money, the trust can provide for what happens under all of those contingencies.

Creating a trust with an experienced estate planning attorney allows you to plan for yourself and your beneficiaries, and if you chose to avoid probate, to do so in a way that will work for all of your assets and to avoid problems created by solely using TOD/POD accounts.

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

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Do You Need Power of Attorney If You Have a Joint Account?

Clients often, sometimes at the suggestion of their bankers, add names onto accounts to make money accessible upon the incapacity or death of a parent.  This often leads them to assume they don’t need a Power of Attorney (POA), and they don’t realize that Powers of Attorney are designed to permit access to accounts upon incapacity of a parent. There are some pros and cons of doing this in either way, as discussed in the article “POAs vs. joint ownership” from NWI.com.

The POA permits the agent to access their parent’s bank accounts, make deposits and write checks.  However, it doesn’t create any ownership interest in the bank accounts. It allows access and signing authority.  This is usually what individuals are thinking of when they create these accounts.

If the person’s parent wants to add them to the account, they become a joint owner of the account. When this happens, the person has the same authority as the parent, accessing the account and making deposits and withdrawals.

However, there are downsides. Once the person is added to the account as a joint owner, their relationship changes. As a POA, they are a fiduciary, which means they have a legally enforceable responsibility to put their parent’s benefits above their own.  As an owner, they can treat the accounts as if they were their own and there’s no requirement to be held to a higher standard of financial care.  You can see the following article for more on this point.  https://www.galliganmanning.com/effect-of-adding-someone-to-your-bank-account/

Because the POA does not create an ownership interest in the account, when the owner dies, the account may pass to the surviving joint owners, Payable on Death (POD) beneficiaries or beneficiaries under the parent’s estate plan.

It also avoids the creation of a gift, which may have estate tax or Medicaid ramifications.

If the account is owned jointly, when one of the joint owners dies, the other person becomes the sole owner.

Another issue to consider is that becoming a joint owner means the account could be vulnerable to creditors for all owners. If the adult child has any debt issues, the parent’s account could be attached by creditors, before or after their passing.  I worked closing on a case with the opposite scenario, a creditor a parent collected money that otherwise would have gone to the children.

Most estate planning attorneys recommend the use of a POA rather than adding an owner to a joint account. If the intent of the owners is to give the child the proceeds of the bank account, they can name the child a POD on the account for when they pass and use a POA, so the child can access the account while they are living.

One last point: while the parent is still living, the child should contact the bank and provide them with a copy of the POA. This, allows the bank to enter the POA into the system and add the child as a signatory on the account. If there are any issues, they are best resolved before while the parent is still living.

Reference: NWI.com (Aug. 15, 2021) “POAs vs. joint ownership”

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A Will is the Way to Have Your Wishes Followed

Individuals often do not make or appropriately update wills because they wrongly believe they aren’t necessary, but the will is the place for your wishes.

A will, also known as a last will and testament, is one of three documents that make up the foundation of an estate plan, according to The News Enterprises’ article “To ensure your wishes are followed, prepare a will.”  Two other very important documents are the Power of Attorney and a Health Care Power of Attorney. These three documents all serve different purposes, and work together to protect an individual and their family.  Today I’ll focus on the will and its important for conveying your wishes for your assets.

In our practice, we often encounter situations where a person passes away either without a will or without updating their existing will, both of which can lead to tragic results.  Assets will often go to unintended beneficiaries with far greater cost, difficulty and time.

There are a few situations where people may think they don’t need a will, but not having a will or updating it properly can create complications for the survivors.  Here are a few instances where people mistakenly believe they do not need a will.

First, when spouses with jointly owned property don’t have a will, it is because they believe that when the first spouse dies, the surviving spouse will continue to own the property. However, with no will, the spouse might not be the first person to receive any property that is jointly held, and it is especially true that the spouse may not be the first person to receive individually jointly owned property, like a car.  Even when all property is jointly owned—that means the title or deed to all and any property is in both person’s names –upon the death of the second spouse, an intestate (meaning no will) proceeding may have to be brought to court through probate to transfer property to heirs.

We frequently encounter situations where an executor will say that the decedent told them what they want, and that it does not match the will.  Or even worse, a decedent will have an old will that no longer reflects their wishes, such as not updating a will after getting married. In these situations, the will controls the property, even though the wishes are now wrong. It is critical to update your will with changes to make sure that the will conveys your estate to the beneficiaries you want.

Secondly, any individuals with beneficiary designations on accounts transfer those accounts to the beneficiaries on the owner’s death, with no court involvement. The same may apply for POD, or payable on death accounts.  In Texas you can even go so far as to name a beneficiary specifically on your deed or car title.  If the beneficiary named on any accounts has passed, however, their share will go into your estate, forcing distribution through probate.  Beneficiary designations also don’t adequately plan for successors, incapacity of beneficiaries and sometimes don’t allow many beneficiaries.   Clients often try to avoid probate on their own by the use of beneficiary designations, but we often have to open estate administrations where they are incomplete or ineffective for the above reasons.

Third, people who do not have a large amount of assets often believe they don’t need to have a will because there isn’t much to transfer. Here’s a problem: with no will, nothing can be transferred without court involvement. Let’s say your estate brings a wrongful death lawsuit and wins several hundred thousand dollars in a settlement. The settlement goes to your estate, which now has to go through probate.

Fourth, there is a belief that having a power of attorney means that they can continue to pay the expenses of property and distribute property after the grantor dies. This is not so. A power of attorney expires on the death of the grantor. An agent under a power of attorney has no power, after the person dies.

Fifth, if a trust is created to transfer ownership of property outside of the estate, a will is necessary to funnel unfunded property into the trust upon the death of the grantor. Trusts are created individually for any number of purposes. They don’t all hold the same type of assets. Property that is never properly retitled, for instance, is not in the trust. This is a common error in estate planning. A will provides a way for property to get into the trust, upon the death of the grantor.  This is called a pour over will.  See here for more details.  https://www.galliganmanning.com/i-have-a-trust-so-why-do-i-need-a-pour-over-will/

With no will and no estate plan, property may pass unintentionally to someone you never intended to give your life’s work to. Or, having an out of date will that doesn’t reflect your wishes may direct property to someone you no longer wanted to benefit.  Having an up to date will lets the Executor know who should receive your property. The laws of your state will be used to determine who gets what in the absence of a will, and most are based on the laws of heirship. Speak with an estate planning attorney to create a will that reflects your wishes, and don’t wait to do so. Leaving yourself and your loved ones unprotected by an up to date will, is not a welcome legacy for anyone.

Reference: The News Enterprise (September 22, 2019) “To ensure your wishes are followed, prepare a will.”

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