Most people assume that their Wills will control where their assets go after they die. Increasingly, however, beneficiary designations are controlling how assets are distributed, and sometimes with unexpected results. Beneficiary designation forms are completed not only for life insurance and retirement plan assets, but also with respect to many bank and brokerage accounts, sometimes without the full knowledge of the account owner. These bank and brokerage accounts with beneficiary designations built in are sometimes called payable-on-death (POD) or transfer-on-death (TOD) accounts. With a POD or TOD account, there is no transfer of ownership during lifetime, with the transfer to the named beneficiary occurring at the death of the account owner.
TOD and POD accounts differ from jointly-held accounts, where ownership is shared with one or more other individuals during their life time, with any of the joint owners having the right to withdraw money from the account at any time. Ownership of a joint account vests in the surviving joint owner(s) at the death of the first joint owner to die. There are also accounts where someone else is designated as having check writing authority, but this feature lapses at death, with the asset then falling into the estate of the deceased account owner.
It is quite often the case that people are not aware of what kind of account they are getting when opening a new account at a bank or with a stockbroker. The question is asked “Would you like to put someone else’s name on the account?”, but this can mean a variety of things. However, how the account is titled can mean a big difference with how the account is treated during the estate administration process. If for example, an oldest child is named as the beneficiary of a POD or TOD account, the entire amount in the account will be transferred to the oldest child at the death of the account owner, with the other children inheriting nothing from the account. Meanwhile, the account owner might have thought that the oldest child merely had check writing authority. For obvious reasons, this can result in discord among the account owner’s children.
Even if someone’s accounts are properly titled to include all children as the death beneficiaries, titling all accounts in POD or TOD format can leave no assets in an estate to pay inheritance taxes or to fulfill special bequests to individuals or charity. This can make life very difficult for an executor. In addition, POD and TOD accounts typically are “frozen” at the death of the account owner, with no transfer occurring until the Pennsylvania Department of Revenue is satisfied that appropriate inheritance taxes will be paid. Thus, it can take longer to access POD and TOD accounts than is the case with regular probate assets.
Another disadvantage of POD and TOD accounts, as well as other assets with beneficiary designations such as retirement plan assets, is that if one of the death beneficiaries predeceases the account owner, the predeceased beneficiary’s children will not inherit, but rather the account will be divided among the surviving beneficiaries. This is a problem that can be easily avoided with probate assets, with the “per stirpes” designation meaning that a deceased beneficiary’s shares goes instead to his or her children.
While in some cases there are very good reasons to use POD and TOD accounts, too often the designation is used carelessly and without the knowledge of the account owner’s estate planning attorney, with sometimes unfortunate results. Furthermore, how an account is titled is information that institutions are prohibited from sharing with those who are not the account owners, making this information difficult to access. The situation is made worse because those working for these institutions are not always familiar with the variations in the different types of accounts or the effects of making certain designations.
The moral of the story is that it is extremely important for you to know how your various accounts are titled, and that your attorney is familiar with this information. In addition, you should be reviewing your account designations on a regular basis, to make sure that the death beneficiaries named have kept up with changing circumstance. Your Will does not control assets with beneficiary designations, so merely updating your will cannot fix improperly titled assets.
