pay on death account Archives

Dear Liz: In response to a reader who asked about creating a will, you suggested options for low-cost online resources. That is great! But, I would encourage you to remind readers to designate beneficiaries on accounts and assets where that option is available.

While they should still have a will, many readers may not know that they can add beneficiaries to brokerage, checking, and savings accounts (in addition to IRA and retirement accounts) so that their assets will pass directly to the designated beneficiaries and not have to go through probate with the extra hassle, time and expense.

For those without a trust, designating beneficiaries may be the easiest way to pass on many of their assets. In California (and some other states), even houses may pass without probate with a transfer-on-death deed. Many readers may not know about the option to add beneficiaries, and you would do your readers a service by educating them about it.

Answer: Anyone adding beneficiaries to accounts needs to be aware of some major potential drawbacks.

A big one involves settling the estate. If all available funds are transferred directly to beneficiaries, the person settling the estate may not have enough cash to do their job.

Beneficiary designations can also result in unintentionally unequal distributions if there’s more than one heir, and complications if the beneficiaries die first or aren’t changed appropriately as life circumstances change.
That’s not to say that beneficiary designations are the wrong choice, but they’re certainly not a one-size-fits-all option.

Dear Liz: I was perplexed by your column in which you pooh-poohed pay-on-death and transfer-on-death accounts in favor of trusts. But you gave no specific explanation. Rather, you said trusts “generally allow a smoother, more organized settlement of the estate than other probate-avoidance options.” Would you please explain what is smoother and more organized than POD and TOD transfers? (Beneficiary deeds fall into the same category as POD and TOD, to my way of thinking.) These transfers simply involve a copy of the death certificate and some minimal paperwork. What could be simpler?

Answer: The fact that you asked this question suggests you may not be familiar with the many ways these transfers can cause unintended problems. An estate planning attorney could fill you in.

One issue covered previously in this column is the fact that the person settling the estate typically needs money to pay final bills. If all the funds in the estate have been transferred to beneficiaries, the executor would have to beg for money to be returned (with no guarantee beneficiaries will cooperate) or pay the expenses out of their own pocket.

Another obvious issue is unequal distribution if you have more than one heir. Account values can change over time, leading to sometimes dramatic differences in what the beneficiaries receive.

Speaking of change, it’s the one constant in life. A living trust allows you to easily update your estate plan in one centralized place as circumstances change. Altering beneficiary designations can take a lot more work, and it’s easy to miss an account if you have several.

Beneficiary designations offer limited contingency planning. If the beneficiaries die before you or otherwise can’t inherit, the account could come back into your estate and be subject to probate. Also, many people forget to update their beneficiaries after major life changes, which can mean the wrong people inherit. More than one ex-spouse has received retirement funds or life insurance proceeds because the beneficiary form wasn’t updated.

Another unfortunately common occurrence is an inheritance that disqualifies a disabled beneficiary from receiving government benefits. You also can’t control how money is spent with a beneficiary designation, which can be a problem if the beneficiary is a minor, an addict or a spendthrift.

Plus, people get sued. Beneficiary designations offer no protection against creditors, while a properly written trust can help protect your assets and your heirs’ inheritance.

This is by no means an exhaustive list of the potential issues with beneficiary designations. They can be a solution for people with limited funds who can’t afford to pay an estate planning attorney, or when they’re part of a coordinated estate plan. Many people set up a trust for real estate and financial accounts, for example, and use beneficiaries for retirement accounts, notes Jennifer Sawday, an estate planning attorney in Long Beach.

The more money you have and the more complex your situation, the more you — and your heirs — would benefit from expert, individualized advice.

Q&A: Should you add beneficiaries to all your accounts?

Q&A: “Simple” ways to avoid probate often create complications