(News Tribune) - When creating your estate plan, it is important to understand the difference between probate and non-probate assets.
Probate assets are those subject to court administration in a process through which a court determines how to distribute your property after you die. Some assets are distributed to heirs by the court as probate assets, while others may bypass the court administration process and go directly to your beneficiaries as non-probate assets.
Probate assets are any assets that are owned solely by the decedent. Many of the probate assets our firm addresses for clients include the following: (a) real property that is titled solely in the decedent's name or held as a tenant-in-common; (b) personal property, such as jewelry, furniture, clothing and automobiles; (c) bank accounts that are solely in the decedent's name; (d) the decedent's interest in a partnership, corporation or limited liability company; (e) any life insurance policy, investment or brokerage account that lists either the decedent or the estate as the beneficiary.
Non-probate assets generally include the following: (a) real property that is held in joint tenancy or as tenants by the entirety; (b) bank accounts, investments or brokerage accounts held in joint tenancy or with payable on death (POD) or transfer on death (TOD) beneficiary designations; (c) property held in a trust; (d) life insurance or brokerage accounts that list someone other than the decedent as a beneficiary; (e) retirement accounts with beneficiary designations.
It is important to note a POD often supersedes a last will and testament. For example, if a POD account has a brother named as the beneficiary, and the will of the asset owner lists a sister as the beneficiary of the same asset, the POD-designated beneficiary is likely to prevail as the owner.
POD accounts function like, and are often considered, an informal trust. Some parties even refer to a POD account as a Totten Trust. Totten Trusts are a type of bank account that allow assets to be transferred to a beneficiary after the depositor's death. The process allows the depositor to act as a trustee for the beneficiary, who is named when the account is opened or at a subsequent time when the depositor is still alive. Totten Trusts are also called tentative trusts or payable-on-death bank accounts. During the depositor's lifetime, the beneficiaries have no rights or access to the account. The depositor remains in control and able to spend the money, close the account or amend any beneficiary designation. To the outside world, the account functions and appears as if no POD beneficiary was designated.
Who can you name as a POD beneficiary? The rules for POD accounts are somewhat flexible, so the possibilities are many. One beneficiary may be designated on several accounts or multiple beneficiaries may be designated for one account. Friends, loved ones, strangers, a probate estate or an IRS-recognized charity may be designated as a POD beneficiary. In some instances, a successor POD beneficiary may be designated in case the first choice predeceases the depositor. If all of your POD beneficiaries predecease the depositor, money in the account will become part of the probate estate and will be administered according to the decedent's last will and testament or according to the intestate succession statutes if no will exists.
What type of account may involve a POD beneficiary? All bank accounts; more specifically, all checking accounts, savings accounts, money market accounts and certificates of deposit may contain a POD beneficiary. Similarly, retirement accounts, IRAs, and other accounts may host TOD designations. Joint accounts may also include a POD beneficiary designation. In the joint account scenario, the non-probate distribution will only occur after the last account owner dies.
How does a POD beneficiary obtain his or her asset upon the owner's death? Claiming ownership of a POD account is a straightforward process. The beneficiary approaches the bank, credit union or governmental entity in charge of the asset and presents a copy of the owner's death certificate to confirm his or her death. The beneficiary will also be required to confirm his or her identity by displaying a valid identification and completing any forms required of the asset controlling party. While some states have a short waiting period, Missouri generally allows beneficiaries to claim the asset immediately.
POD designations are not without issues. Like most things, if it sounds too good to be true, it probably is! In general, POD accounts are easy to establish; however, they can lead asset owners to believe they have perfected an "estate plan," and no additional steps or documents are needed. While this may or may not be true depending upon the size and scope of an estate, there are many things that can, and often do, go wrong with POD accounts such as the following:
1. Naming multiple beneficiaries can complicate the process of dividing the proceeds from complex financial instruments, such as bonds. Dividing financial instruments often requires negotiations and compromises among the beneficiaries.
2. POD accounts are revocable; therefore, a POD established on a joint account owned by spouses in a second or subsequent marriage can be changed after one of the owners dies. For example, if the joint account owned by spouses contains a POD to their three respective children from their first marriages, the wife, as the remaining account owner, can potentially change the POD beneficiaries to her own three children and disinherit the three stepchildren. Continuing that example, the wife could marry the pool boy after the husband dies and change the beneficiary of the POD account to the new spouse, thereby disinheriting all children and erasing the memory and wishes of her previous spouse.
3. If the asset is owned by an individual and that individual becomes mentally incapacitated, a court-ordered guardian/conservator or a predetermined agent in a power of attorney may be required to control the asset if it is required while the owner is still alive.
4. If a POD beneficiary obtains the asset while a minor (under the age of 18 in Missouri) then a court-supervised guardianship or conservatorship will likely be required to manage or supervise the inheritance until the minor reaches the age of majority.
5. If all of the named POD beneficiaries predecease the asset owner, the account may have to be administered in a probate estate.
6. An owner cannot always use the process of POD designations to avoid paying debts. In some instances, assets may be clawed back into a probate estate should the totality of the estate lack sufficient funds to pay all creditors.
7. Missouri law at Section 461.059 RSMo., specifically reads that non-probate transfers are exempt from any law intended to protect a spouse or child from unintentional disinheritance by the will of a testator.
In summary, POD designations are a useful tool incorporated in most professional estate plans. Everyone should consider incorporating them in some way to avoid probate administration. But they are not free from issues. Reach out to an experienced estate planning attorney to discuss their use and efficacy.
By Todd Miller
August 7, 2023
Todd Miller is a monthly contributor and regularly writes and speaks on various legal topics including bankruptcy, estate planning, probate, and elder law. He formed the Law Office of Todd Miller, LLC, 1305 Southwest Blvd., Ste. A, Jefferson City, Missouri in 2006. He earned his juris doctorate degree from the University of Missouri School of Law in 1999 and graduated with honors from Lincoln University in 1991. You may find him at www.toddmillerlaw.com or (573) 634-2838.
