Use of POD/TOD Accounts in Estate Planning

Many of my clients are surprised by how a Payable on Death (“POD”)/Transfer on Death (“TOD”) account (“Account”), which names beneficiaries to receive the funds upon an account holder’s death, can be very useful to their overall estate plan.  However, care is needed to avoid any unwanted surprises when using such an Account.

Benefit: Simplicity and Timing

The most important benefit of these Accounts is simplicity.  The owner of these Accounts, which can range from bank accounts to brokerage accounts to retirement accounts, names a beneficiary with the applicable financial institution.  When the owner dies, a certified death certificate is sent to the institution, accompanied with proof of that beneficiary’s identity and generally, the institution then re-registers the Account in the beneficiary’s name.[1]  Overall, the funds get to a beneficiary relatively quickly and avoid the longer probate process.

In contrast, probate is the formal legal process that occurs with a Will after a person’s death.  While this process helps minimize a decedent’s legal mess, the probate process, and distributions to beneficiaries pursuant to a Will, take much longer to happen.  For example, currently, to open a probate estate in New York County (Manhattan), which is merely the first step in the process, can take several months as the NY Surrogate Court system is backed up with probate applications.[2]

These Accounts are particularly useful since there are many upfront costs after someone dies, including expensive funeral and burial costs.  As a result, loved ones generally must pay significant expenses upfront and while other assets are tied up in probate for a much longer time, the funds from these Accounts can also be used for reimbursement.

Potential Pitfalls: Surprises if not Diligent

Surprises can occur if there is an inadvertent discrepancy between the named beneficiary on the Account with the named beneficiaries set forth in other Estate planning documents, such as a Will or a Trust.  This comes up in many types of scenarios.

For example, if you intend to leave everything to your two (2) daughters equally and your recently executed Will makes this clear, but years ago, you only named one daughter as the beneficiary on your POD brokerage account, which has most of your wealth at the time of your death.  As a result, your intent will NOT happen upon your death as one daughter will receive most of your Estate because of the POD brokerage account.

Or, you and your spouse are a blended family with two children apiece from prior marriages.  You agree in your Wills that if something happens to both of you, both sets of children would share equally in your respective Estates and this will be the case no matter who dies first.  However, after your spouse dies, your bank sends you an on-line link to add beneficiaries to one of your major accounts and you only add your kids as slips your mind, which is inconsistent with the plan to treat both sets of children equally.

And, finally, the scenario I see most often with new clients that want me to review their existing documents.  Most of my clients name their children as their beneficiary but in most estate plans, whether through a Will and/or a Trust, assets are placed in trust for the children’s benefit if the children inherit before a certain age.  This allows the assets to be protected until the children reach certain age thresholds and are expected to be better able to handle the funds.

However, many people simply name their kids as beneficiary on an Account, with no protections.  If the child then inherits before 18 years old because of an unexpected death, while the financial institution will not release the funds to him or her as still under age 18 (instead, a guardianship may have to be established), the money will be released to the beneficiary in a lump sum at age 18, which is considered an “adult” for purposes of inheritance in most U.S. jurisdictions, including New York and New Jersey.  For many clients, this is not what they want as they feel their child at age 18 will not be fiscally responsible and could easily squander the funds.

What to Do

The terms of an Account, including the named beneficiary, supersede the terms of even the most well-drafted and validly executed Will or Trust as to the Account.  To avoid the above-mentioned unintended results, it is essential that beneficiary designations on Accounts be carefully reviewed and coordinated as part of the estate planning process.

Before someone’s death, it is relatively straightforward to change a beneficiary designation on an Account with the institution to better align with your overall estate planning and other legal documents.  Moreover, if you name a beneficiary on an Account who then predeceases you, such that there is no beneficiary anymore on the Account, you need to contact the institution and add a new beneficiary, or the Account will become a probate asset on your death.  Finally, particularly with kids named as beneficiaries, you can send language to the financial institution, for the beneficiary designation on the Account, that ties to the applicable Will or Trust and better protects your children in case something unexpected happens to you.

Overall

I recommend POD and TOD accounts for their simplicity and a means to get funds to your beneficiaries quicker, but you must ensure that these documents remain consistent with your overall estate planning.

[1] In New Jersey, which has a state inheritance tax, banks/financial institutions also generally require a completed Form L-8 to release all the funds in an Account.

[2] Note that New Jersey probate system is much more efficient (and yes, I did use the word efficient with New Jersey and that is not a typo).