The following is an article from the July 2017 issue of "Get Your Ducks in a Row" Carolina Family Estate Planning's free newsletter. You can read the rest of the issue, as well as back issues of our newsletter online at www.carolinafep.com/library/newsletters/ or subscribe for free at www.carolinafep.com/newsletter.cfm
As an estate planning attorney, my job is to make sure your assets get to the correct beneficiaries, the way you wanted your beneficiaries to receive them, in an organized and efficient manner. As I recently explained to a client, it is not sufficient to just “cross your fingers” and hope it all works out!
A question I often get asked is, “Why not just use Payable on Death (POD) or Transfer on Death (TOD) designations to pass down my assets and avoid probate?” These designations—which I’ll refer to as POD designations for the rest of the article—may be recommended by financial professionals and institutions, and they can indeed bypass probate. However, just like joint accounts, there are many ways things can go wrong when people rely on them to distribute their estate, which is why you won’t see many estate planning attorneys recommend them, except under very specific circumstances, and with a deep understanding of a client’s situation.
POD Designations could make more work (and more fees) for your executor.
Before distributing assets to your beneficiaries, your executor is responsible for making sure any debts and claims against your estate get paid. Whether it’s a car loan, credit card bill, nursing home or hospital bills, partial month’s utilities, funeral expenses, or something else, most people die with some debts.
Now consider this: In some counties, it can take a few weeks for the executor to get appointed by the court. After being appointed, your executor must publish a Notice to Creditors in the newspaper and start determining what claims or debts there are in the estate.* Creditors have three months to respond. This means it could be four months or longer before your executor can account for all the debts and claims against the estate.
However, during that time, the beneficiaries you named POD on your accounts can claim the accounts from the bank. What if there’s a sum due, but all of the accounts had POD designations and paid out to beneficiaries? To satisfy the claims against the estate, the executor has to initiate a special proceeding to pull assets back into the estate. As you can imagine, when the executor has to notify beneficiaries they have to return funds to the estate, no one ends up happy, especially if some of the money has already been spent.
*Note that if you have a Living Trust, your Trustee settles your debts and claims privately so that a probate estate does not have to be opened.
There Are Additional Risks and Disadvantages of Relying on POD Designations
POD designations are not nearly as flexible as a Will or Living Trust when it comes to allocating your estate, providing contingent instructions, or providing protections for your beneficiaries. The following are examples of how POD designations can fail to work the way you wanted:
· Unlike assets passed in trust, the assets are distributed to your beneficiary outright. They have no protection from your beneficiary’s lawsuits, creditors, divorce, or similar.
· If a beneficiary is disabled at the time of inheritance, an outright inheritance will likely disqualify the beneficiary from receiving public disability benefits.
· If your beneficiary is a minor, a court process may be needed to appoint a guardian to handle the assets on behalf of the minor beneficiary.
· Many institutions only permit equal shares on a POD designation, which may not be how you want to divide your estate.
· POD designations generally do not include detailed contingent instructions. So if one of your beneficiaries dies before you, most institutions automatically reallocate to the remaining surviving beneficiaries.
That might not be what you want. For example, if you named your children in your POD designation, and one of them predeceased you, your grandchildren by that child could be unintentionally disinherited when the bank distributes equally to the surviving beneficiaries you named directly.
· Assets pass to the beneficiary as a lump sum, with no controls against frivolous spending.
· We find that POD designations often contradict what the rest of the estate plan says. For example, a client’s Will might say to divide their assets equally among all three of their children. But if a POD designation only names one of the children as a beneficiary, the POD designation trumps the Will, and the other two children get nothing from that account.
· Disparate results—some clients have different POD designations on different accounts. Over time, the balance in the various accounts can change, leading to a much different distribution of the estate than may have originally been intended.
Further, imagine you become incapacitated, and your power of attorney manages your accounts on your behalf. They’ll have to decide which account to use to pay your bills. If some of your accounts designate your power of attorney as a beneficiary, and others do not, they have a powerful incentive to pay expenses out of accounts that would go to your other beneficiaries first.
When you think about all the things that could go wrong with POD designations, you can see why I urge people to think twice about depending on them.
Hoping for the best for your and your family,