Positives & Negatives Of Payable-On-Death & Transfer-On-Death Accounts
Estate planning is seen by the average person as a difficult, drawn-out process, especially if they have more than a few assets. Because of this, people who try to handle their estates on their own tend to gravitate toward what are known as payable on death (POD) or transfer-on-death (TOD) accounts. However, there are both positives and negatives to these accounts, and without a good understanding of both, you may wind up facing an unpleasant surprise.
Revocable Trusts Are Preferable
In most situations, an experienced estate planning attorney will recommend a revocable trust instead of POD or TOD accounts. Revocable trusts are essentially documents that govern how your assets will be distributed after your passing – ‘revocable’ merely means that you, the settlor (trust creator) can make appropriate changes if necessary. Your assets will be placed in the trust, where you as the settlor have access to them, but they are no longer in your name, which avoids probate for all trust assets. Very often, the settlor will act as the first trustee, but can name a successor trustee to administer the assets at a later point.
All this notwithstanding, though, some people do opt for POD and TOD accounts because they have fewer assets or just want a simpler process. In Florida, certain financial instruments like brokerage accounts, mutual funds, stocks, and bonds can be designated as transferable on death to the listed beneficiaries, while standard bank accounts can be payable on death to a designated beneficiary. In both cases, it is generally possible to avoid probate for the account – but you may not be able to avoid tax problems, particularly with joint beneficiaries.
If you do think that TOD accounts or POD accounts are an option for you, it is crucial to be aware of the negatives as well as the positives. Perhaps the most important factor to keep in mind is the potential tax implications of what may be a significantly large gift to the beneficiary in question. While some taxes can be avoided by making, say, a mutual fund account transferable on death – after all, the beneficiary does not become the owner until after your passing – other tax burdens may come up at that point, even without probate being necessary.
TOD/POD accounts are also not necessarily recommended for those who have children from a previous marriage. If you later divorce or your marriage otherwise experiences problems, you may wind up leaving your spouse in a position to disinherit your children, or potentially leave other beneficiaries out in the cold. Essentially, a transfer-on-death account or payable-on-death account only conveys the asset to the named beneficiary. It does not offer any other protections for beneficiaries – for example, a POD bank account might be earmarked for a certain person, but because they have no claim to it until the owner dies, the owner might wind up using the money for nursing home expenses or other end-of-life care. The beneficiary would have little to no recourse.
Contact A Naples Estate Planning Attorney
If you have questions, concerns or just want to set up a complimentary consultation to discuss your personal legal issues in a confidential setting, contact James R. Nici, the Managing Partner of Nici Law Firm, a Naples estate planning attorney with almost 30 years of legal experience. This may be the first step toward ensuring all is how you want it to be going forward. Contact our offices today via our website, or on the telephone at 239-449-6150, to schedule your complimentary consultation.