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Transfer on death or TOD accounts, sometimes known as Payable on Death or POD are form beneficiary designations. Beneficiary designations are most commonly known to us in life insurance. Every life insurance policy has a beneficiary. We are all familiar with beneficiary designations for our 401K or IRA. It is rare that we do not designate a beneficiary for an IRA. And if married, by law, the beneficiary of a 401K is the spouse.
When you set up your estate plan, you think carefully about who is going to inherit or take your property when you die. Whether you use a will or a trust, our definition of estate planning is:
You want to control your property while you are alive,
Take care of yourself and loved ones, if you become disabled,
And give what you have to whom you want,
The way you want and
When you want.
And save every last tax dollar, administrative fee and legal cost
possible.
TOD accounts disrupt and thwart these goals.
If you did your estate planning with us, you considered who your executor, agent or trustee will be, who will make health care decisions for you, who will assist you with financial and health decisions if you have diminished capacity, what property will avoid probate, what proportion of your estate an individual will receive, whether to inherit outright or in trust, what type of trust and how to allocate certain assets, how to include IRAs and 401Ks and the special tax rules all these follow. All this can be undone with thoughtless TOD designations.
Recently we assisted a family with an infirm parent. The parent had a detailed revocable trust plan prepared by another law firm which specialized in estate planning. The attorney is highly regarded. The trust detailed how expenses will be paid upon death, what percentages each child shall receive, the timing of the final distribution, the professional trustee in charge of the post-mortem administration, tax considerations, personal property distribution and whether in trust or outright. At least two children have mental impairments. They should not be given significant assets.
Hence the professional trustee designated in the revocable trust to manage the assets.
The vast majority of the plan was disrupted by a financial advisor who suggested to the parent, at the time over the age of 90, to change the entire scheme by designating a large investment account as TOD.
When the adult child who was incapacity trustee asked the financial advisor how debts and taxes due be paid, the financial advisor said that it was up to the other children as to whether any of the debts would be paid from their share. There was no plan.
Actually, the IRS cares little about TOD and will aggressively pursue the TOD beneficiaries for taxes owed by the parent or the parent’s estate from whatever the child receives. Unfortunately, the IRS does not care about collecting pro-rata from each beneficiary, but will collect from whichever beneficiary is most available. This leaves that unfortunate individual with the task of seeking reimbursement from the other beneficiaries.
When you set up a TOD account, the assets go directly to beneficiaries upon the owner's death. While these accounts avoid probate, this must be carefully coordinated with the overall estate plan, especially for larger accounts and estates.
While simply titling an account "Transfer on Death" and adding a beneficiary or two may be quick and easy, it is not simple.
For one, there is no asset protection. The asset goes to the individual outright.
Second, your TOD accounts need to be coordinated with your overall estate plan. The importance of this grows with the size of your net worth. Failing to keep beneficiaries' updated as your family changes can work inequities. Some children become successful while others suffer disabilities or other misfortunes.
Third, be careful when naming a minor as beneficiary on your
Transfer on Death account. Investment firms will not release the assets of an account to a minor. This can require a limited court guardianship. A TOD does not give instructions on how to manage and use the money. When the minor reaches the age of majority, it must be given to the child.
Fourth, in addition to protecting the young from mismanagement, a trust can protect your beneficiaries from creditors at any age. With a TOD account, the only condition necessary for your beneficiary to have a right to the asset is your death.
If a child has a judgment against them, the creditor could potentially seize the asset intended to benefit the family. If there is a divorce after receiving the asset it can be a consideration in a property, support or alimony dispute.
If creditor protection is a concern, placing an asset in a beneficiary controlled trust can keep it safe for the benefit of your children and out of reach of their creditors.
Finally, with a TOD account, who is responsible for paying your final expenses? How do you ensure that a TOD beneficiary reimburses the one who pays for your funeral and final bills? With a TOD account, you cannot.
With a trust, your debts can be paid out of trust assets, and the remainder, once your debts are settled, distributed equally to your intended beneficiaries. The same can occur by using a will as the probate estate pays the expenses.
Trusts do involve more expense and effort at the outset than transfer on death accounts. But that expense should be viewed in the light of an investment in protecting yourself, your family, and the assets you want to leave for them.
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