Adding transfer-on-death (TOD) and payable-on-death (POD) designations to financial accounts can be a helpful way to ensure beneficiaries efficiently receive assets intended for them. However, to avoid unintended negative consequences, account designations do need to be carefully coordinated within overall estate plans.
Connecting The Dots
Assets designated for transfer or payment upon death generally get to beneficiaries relatively quickly, because they do not need to pass through the public probate process. Of course, expedient distribution of assets is great for families and convenient for financial institutions. Legal experts remind us however, that TOD and POD designations do need to be synced up with the overall estate plan, and failure to do so can dramatically backfire:
If family members or trusts are included in an estate plan but TOD/POD designations direct most of a decedent’s assets elsewhere, the provisions of the estate plan will not be implemented….TOD/POD designations can be used effectively in conjunction with an estate plan to avoid probate while ensuring that the provisions of a revocable trust are still operative, such as by naming the trust as the beneficiary.
….TOD/POD designations can create liquidity problems…: If all or substantially all of an individual’s financial accounts pass by TOD/POD designations, leaving only illiquid assets such as real estate or closely held business interests in the estate, there may not be sufficient cash held in the estate to pay estate expenses and any…estate tax that might be due…The personal representative might need to recover necessary funds from the beneficiaries of an account with TOD/POD designations.
Reassess and Update
Estate plans, including trust agreements, typically need to be reassessed and updated every few years, and sooner if a family experiences a major life change, such as birth, marriage, divorce, or a decline in capacity or assets. When updating an estate plan, remember that the TOD and POD designations also need to be reviewed and updated to ensure continuous alignment within the whole estate plan:
As circumstances change, people often wish to reconsider their estate planning goals. It is easy to forget to update TOD/POD designations at the same time, especially if one’s estate planning attorney is not aware of such designations. This inadvertent omission increases the risk that a customer’s wishes will not be carried out upon death. Whenever a customer is considering putting a TOD/POD designation on a major financial account, the customer should be warned that the designation may have unintended effects on his or her overall estate plan. As such, it should be made clear that the customer is not required to make a TOD/POD designation, and the customer should be advised to consult with his or her estate planning attorney to discuss how such designation should be integrated with his or her estate plan.
When creating and updating estate plans, it is also critical to ensure the loved one, friend or professional designated to serve as your fiduciary understands your ultimate goals, and has the detailed information needed to carry them out. Depending on your circumstances and region, your fiduciary may be specifically referred to as an executor, trustee, or personal representative. Regardless of the details of your estate plan, the fiduciaries you appoint have a legal responsibility to carry out your affairs, in accordance with the intentions set forth in your will and or trust–and the law. When representatives are designated, fiduciary bonds, alternatively referred to as estate bonds, can be required as a safeguard for the interests of the estate and beneficiaries. Learn more about estate bonds right here.
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