Last week I fielded a question from a reader about the perils of contingent beneficiary designations. This week I received a phone call from a prominent estate planning attorney recommending I discuss the pros and cons of using ‘Payable-on-Death’ (POD) agreements which are being used more and more by brokerage firms and banks. These agreements are a form of beneficiary designation that transfers the account directly to your chosen beneficiary avoiding probate and bypassing your will. In the right circumstances, this can be a good thing but it is also fraught with risks if not well thought out.
A real life case
In a recent case, an attorney prepared a will for a client who wanted her substantial assets to be equally divided between her two nephews and two nieces. The bulk of her assets were held in two brokerage accounts. She named one nephew as both the executor of her estate and beneficiary of the brokerage accounts under a POD, apparently under the assumption that he was the one who would administer the POD assets for her estate. The nephew took the position that it was his aunt’s intention that he receive one-hundred percent of the brokerage accounts and that he and his fellow beneficiaries would only split the assets passing under the will. The remaining beneficiaries threatened to file a lawsuit and ultimately settled for an amount substantially less than their intended share.
When should you use a POD?
The best uses are where the case facts are simple such as you know you want a certain account to go to a certain person. Let’s look at an example. You are a widow living in an assisted living facility and your sole asset is a brokerage account. You know you want to leave your entire estate to your only child. A POD might be perfectly fine. Now let’s complicate the facts a bit. Same facts except you have three children. If you use a POD and one child predeceases you, your assets will now be split between your two living children. As a result, your grandchildren from your deceased child will receive nothing. Under most wills, those grandchildren would have received their deceased parents’ share of your estate. Caution: This is one example from one bank. “There is not uniformity across financial institutions regarding POD’s so you have to be particularly careful about unintended consequences”, says Birmingham, Alabama estate planning attorney, Bill Hinds, partner, Bradley Arant Boult Cummings, LLP.
Here’s the takeaway
Wills and estates may seem simple, but often are not. When working with clients, we like to identify ‘buckets of wealth’. You can do this too. Start by making a list of all of your assets (and liabilities); then divide the assets into their different ‘buckets’. Your 401k, all of your IRA’s, annuities and your life insurance are buckets that will transfer according to your beneficiary designation. Your personal investment accounts, bank accounts and CD’s are buckets that will transfer either under your will or through a POD. Real estate typically will transfer under your will but can be set up to transfer under a joint ownership with rights of survivorship. Personal property (jewelry, cars, furniture, etc.) typically transfers under your will. Every asset should be traced to its ultimate destination (people, charities or trusts) according to how it is currently set up. Only then can you determine if the disposition of your estate is following your wishes. Then you’ll need to review this every twelve to twenty-four months or when an obvious change occurs. This can be a complicated process, so I recommend you seek the help of a professional such as an attorney specializing in estate planning. Many advisors, including brokers, bankers and even some financial advisors and CPA’s lack expertise in estate planning. For example, it’s often a broker’s assistant who is responsible for getting the POD signed without an understanding of the intent of the overall estate plan.
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