“Beneficiary Designations Aren’t a True Substitute for a Trust” by Attorney Colleen Sinclair Prosser (Audio)
Transfer on Death (TOD) designations, Payable on Death (POD) designations, and other beneficiary designations can be useful estate planning tools in the right circumstances. Each of these tools allows for an automatic transfer of an asset to the named beneficiary at the death of the owner. But these tools can have a few shortfalls. First, if the named beneficiary predeceases the owner, typically it will not be effective to transfer the asset. Sometimes, you could name a contingent beneficiary and then it would go to that person. But, if there is no contingent beneficiary or if they also predecease the owner, the asset may end up in the probate estate of the owner (often what the owner was trying to avoid). Sometimes the account agreement with the financial institution might specify an alternate disposition, like to the spouse or next of kin rather than the probate estate of the owner.
Joint tenancy has a similar drawback. Upon the death of the last joint tenant, the property is included in that owner’s estate. Joint tenancy has an additional hazard during lifetime which can be illustrated by the following example. Mary has only one child, John. Mary wants to transfer all her assets to John at her death. She hears that an easy way to avoid probate is to add John as a joint tenant, so she does that. John gets sued. Unfortunately, Mary’s property held in joint tenancy with John is an asset that can be subject to John’s creditors. So, the “easy” estate planning method became quite costly for Mary.
Another drawback of Transfer on death, Payable on death, beneficiary designations and joint tenancy is they do not plan for the incapacity of the owner. In other words, if the owner becomes incapacitated, the existence of that form of ownership doesn’t help with regard to the management of the asset during the owner’s life.
A revocable trust is typically a better solution and avoids these drawbacks. First, the disposition at death can be much more flexible. You can have multiple contingent takers upon your death. Also, the assets can go to the beneficiaries in a manner which is better for the beneficiaries. Assets in the trust are not subject to the creditors of those intended to receive the asset, unlike with joint tenancy. Finally, a trust provides management of the assets during periods of the owner’s incapacity. While a durable property power of attorney could also accomplish this, it is not as readily accepted due to financial institutions’ reluctance to rely on such documents because of fraud. A revocable trust is much more readily accepted by financial institutions.
While joint tenancy, Transfer on death accounts, payable on death accounts, and beneficiary designations are simple and can work in some circumstances, they have their drawbacks as outlined above. A revocable trust is typically a better way to achieve the goals of avoiding probate at your death.
The information is this article was provided by Stephen C. Hartnett, J.D., LL.M. Director of Education of the American Academy of Estate Planning Attorneys, Inc.
- 25 Years with WNAV - June 22, 2022
- Capital Gains Taxes and Trust Assets - April 21, 2022
- Estate Planning Mistakes - March 29, 2022