Many commentators and clients today voice a concern with avoiding probate. While this blog is not intended to address the desire or merit in avoiding probate, we will highlight some of the potential traps for clients who seek to avoid probate without recognizing the possible ramifications.
The use of Transfer On Death (TOD) and Payable On Death (POD) accounts are two of the most common techniques. The reasons: 1) they are easy to create; and 2) the idea of passing assets to beneficiaries without documents, lawyers, executors and high legal fees sounds great. In some instances these types of accounts are wonderful. However, be careful – they can also be dangerous and have unintended results.
TOD and POD accounts are easily established at most financial institutions. Through the use of these accounts individuals can bypass probate and creditors, but a lot of other important things may also be circumvented. An individual may have planned in his will to benefit others than those people named on the TOD or POD accounts. However, if all of that individual’s assets pass through a TOD or POD account it does not matter what was intended under the will and those beneficiaries named in the will may receive nothing.
Other items that often get overlooked are the payment of estate administration expenses. TOD and POD accounts are immediately payable to the named beneficiaries. But what about the final expenses of the decedent (i.e. funeral bills, mortgage and utility payments and death taxes)? These types of expenses must be paid regardless of whether an individual’s assets flow through his probate estate or pass by beneficiary designation. It can be a very uncomfortable conversation for an executor or family member to have with the beneficiary of a TOD or POD account when he needs to ask that beneficiary to pay back some of the proceeds from the account to cover a decedent’s debts or pay taxes. Many beneficiaries simply don’t want to.
So, is the answer to not use these types of accounts at all? No, but as with any decision a person makes regarding their estate plan, it is important to consider all options, and discuss the implications with estate planning counsel. Creating a TOD or POD account is as easy as signing a form, but its consequences may not be as easy to reverse.
Janene B. Reilly is an attorney in Obermayer’s Philadelphia office, focusing her practice in the areas of estate planning and estate and trust administration. She can be reached at 215-665-3062 or Janene.Reilly@obermayer.com