Category: POD

Several Ways to Avoid Probate

Several Ways to Avoid Probate

Probate can tie up the estate for months and be an added expense. It can be a financial and emotional nightmare if you have not planned ahead. Some states have a streamlined process for less valuable estates, but probate still has delays, extra expense and work for the estate administrator. A probated estate is also a public record anyone can review. There are, however, several ways to avoid probate.

Forbes’ recent article entitled “7 Ways To Avoid Probate Without A Living Trust” says that avoiding probate often is a big estate planning goal. You can structure the estate so that all or most of it passes to your loved ones without this process.

A living trust is the most well-known way to avoid probate. However, retirement accounts, such as IRAs and 401(k)s, avoid probate. The beneficiary designation on file with the account administrator or trustee determines who inherits them. Likewise, life insurance benefits and annuities are distributed to the beneficiaries named in the contract.

Joint accounts and joint title are ways to avoid probate. Married couples can own real estate or financial accounts through joint tenancy with right of survivorship. The surviving spouse automatically takes full title after the other spouse passes away. Non-spouses also can establish joint title, like when a senior creates a joint account with an adult child at a financial institution. The child will automatically inherit the account when the parent passes away without probate. If the parent cannot manage his or her affairs at some point, the child can manage the finances without the need for a power of attorney.

Note that all joint owners have equal rights to the property. A joint owner can take withdrawals without the consent of the other. Once joint title is established you cannot sell, give or dispose of the property without the consent of the other joint owner.

A transfer on death provision (TOD) is another vehicle to avoid probate. You might come across the traditional term Totten trust, which is another name for a TOD or POD account (but there is no trust involved). After the original owner passes away, the TOD account is transferred to the beneficiary or changed to his or her name, once the financial institution gets the death certificate.

You can name multiple beneficiaries and specify the percentage of the account each will inherit. However, beneficiaries under a TOD have no rights in or access to the account while the owner is alive. An estate planning attorney will be able to identify several ways for you to avoid a costly probate. If you would like to read more about probate, please visit our previous posts.

Reference: Forbes (March 28, 2022) “7 Ways To Avoid Probate Without A Living Trust”

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What Assets are in an Estate?

What Assets are in an Estate?

Estate planning attorneys are often asked what assets are included in an estate, from life insurance and real estate to employment contracts and Health Savings Accounts. The answer is explored in the aptly-titled article, “Will It (My Home, My Life Insurance, Etc.) Be in My Estate?” from Kiplinger.

When you die, your estate is defined in different ways for different planning purposes. You have a gross estate for federal estate taxes. However, there’s also the probate estate. You may also be thinking of whether an asset is part of your estate to be passed onto heirs. It depends on which part of your estate you’re focusing on.

Let’s start with life insurance. You’ve purchased a policy for $500,000, with your son as the designated beneficiary. If you own the policy, the entire $500,000 death benefit will be included in your gross estate for federal estate tax purposes. If your estate is big enough ($12.06 million in 2022), the entire death benefit above the exemption is subject to a 40% federal estate tax.

However, if you want to know if the policy will be included in your probate estate, the answer is no. Proceeds from life insurance policies are not subject to probate, since the death benefit passes by contract directly to the beneficiaries.

Next, is the policy an estate asset available for heirs, creditors, taxing authorities, etc.? The answer is a little less clear. Since your son was named the designated beneficiary, your estate can’t use the proceeds to fulfill bequests made to others through your will. Even if you disowned your son since naming him on the policy and changed your will to pass your estate to other children, the life insurance policy is a contract. Therefore, the money is going to your son, unless you change this while you are still living.

However, there’s a little wrinkle here. Can the proceeds of the life insurance policy be diverted to pay creditors, taxes, or other estate obligations? Here the answer is, it depends. An example is if your son receives the money from the insurance company but your will directs that his share of the probate estate be reduced to reflect his share of costs associated with probate. If the estate doesn’t have enough assets to cover the cost of probate, he may need to tap the proceeds to pay his share.

Another aspect of figuring out what’s included in your estate depends upon where you live. In community property states—Arizona, California, Idaho, Louisiana, New Mexico, Nevada, Texas, Washington, and Wisconsin—assets are treated differently for estate tax purposes than in states with what’s known as “common law” for married couples. Also, in most states, real estate owned on a fee simple basis is simply transferred on death through the probate estate, while in other states, an alternative exists where a Transfer on Death (TOD) deed is used.

This legal jargon may be confusing, but it’s important to know, because if property is in your probate estate, expenses may vary from 2% to 6%, versus assets outside of probate, which have no expenses.

Speak with an experienced estate planning attorney in your state of residence to know what assets are included in your federal estate, what are part of your probate estate and what taxes will be levied on your estate from the state or federal governments and don’t forget, some states have inheritance taxes your heirs will need to pay. If you would like to read more about placing assets in an estate plan, please visit our previous posts.

Reference: Kiplinger (Dec. 13, 2021) “Will It (My Home, My Life Insurance, Etc.) Be in My Estate?”

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what a will can and cannot do

What a Will Can and Cannot Do

You want to begin the process of estate planning by drafting a will. That is great. But do you know what a will can and cannot do? Having a will doesn’t avoid probate, the court-directed process of validating a will and confirming the executor. To avoid probate, an estate planning attorney can create trusts and other ways for assets to be transferred directly to heirs before or upon death. Estate planning is guided by the laws of each state, according to the article “Before writing your own will know what wills can, can’t and shouldn’t try to do” from Arkansas Online.

In some states, probate is not expensive or lengthy, while in others it is costly and time-consuming. However, one thing is consistent: when a will is probated, it becomes part of the public record and anyone who wishes to read it, like creditors, ex-spouses, or estranged children, may do so.

One way to bypass probate is to create a revocable living trust and then transfer ownership of real estate, financial accounts, and other assets into the trust. You can be the trustee, but upon your death, your successor trustee takes charge and distributes assets according to the directions in the trust.

Another way people avoid probate is to have assets retitled to be owned jointly. However, anything owned jointly is vulnerable, depending upon the good faith of the other owner. And if the other owner has trouble with creditors or is ending a marriage, the assets may be lost to debt or divorce.

Accounts with beneficiaries, like life insurance and retirement funds bypass probate. The person named as the beneficiary receives assets directly. Just be sure the designated beneficiaries are updated every few years to be current.

Assets titled “Payable on Death” (POD), or “Transfer on Death” (TOD) designate beneficiaries and bypass probate, but not all financial institutions allow their use.

In some states, you can have a TOD deed for real estate or vehicles. Your estate planning attorney will know what your state allows.

Some people think they can use their wills to enforce behavior, putting conditions on inheritances, but certain conditions are not legally enforceable. If you required a nephew to marry or divorce before receiving an inheritance, it’s not likely to happen. Someone must also oversee the bequest and decide when the inheritance can be distributed after the probate.

However, trusts can be used to set conditions on asset distribution. The trust documents are used to establish your wishes for the assets and the trustee is charged with following your directions on when and how much to distribute assets to beneficiaries.

Leaving money to a disabled person who depends on government benefits puts their eligibility for benefits like Supplemental Security Income and Medicaid at risk. An estate planning attorney can create a Special Needs Trust to allow for an inheritance without jeopardizing their services.

Finally, in certain states you can use a will to disinherit a spouse, but it’s not easy. Every state has a way to protect a spouse from being completely disinherited. In community property states, a spouse has a legal right to half of any property acquired during the marriage, regardless of how the property is titled. In other states, a spouse has a legal right to a third to one half of the estate, regardless of what is in the will. Depending on your state and circumstances, it may not be possible to completely disinherit a spouse.

An experienced estate planning attorney can help you understand what a will can and cannot do, and help guide you through the process of drafting your will. If you would like to learn more about estate planning documents, please visit our previous posts.

Reference: Arkansas Online (Dec. 27, 2021) “Before writing your own will know what wills can, can’t and shouldn’t try to do”

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Trust provides more Protection than TOD

Trust provides more Protection than TOD

Many people incorporate a TOD, or “Transfer on Death” into their financial plan, thinking it will be easier for their loved ones than creating a trust. However, a trust provides more protection than a TOD. The article “TOD Accounts Versus Revocable Trusts—Which Is Better?” from Kiplinger explains how it really works.

The TOD account allows the account owner to name a beneficiary on an account who receives funds when the account owner dies. The TOD is often used for stocks, brokerage accounts, bonds and other non-retirement accounts. A POD, or “Payable on Death,” account is usually used for bank assets—cash.

The chief goal of a TOD or POD is to avoid probate. The beneficiaries receive assets directly, bypassing probate, keeping the assets out of the estate and transferring them faster than through probate. The beneficiary contacts the financial institution with an original death certificate and proof of identity.  The assets are then distributed to the beneficiary. Banks and financial institutions can be a bit exacting about determining identity, but most people have the needed documents.

There are pitfalls. For one thing, the executor of the estate may be empowered by law to seek contributions from POD and TOD beneficiaries to pay for the expenses of administering an estate, estate and final income taxes and any debts or liabilities of the estate. If the beneficiaries do not contribute voluntarily, the executor (or estate administrator) may file a lawsuit against them, holding them personally responsible, to get their contributions.

If the beneficiary has already spent the money, or they are involved in a lawsuit or divorce, turning over the TOD or POD assets may get complicated. Other personal assets may be attached to make up for a shortfall.

If the beneficiary is receiving means-tested government benefits, as in the case of an individual with special needs, the TOD or POD assets may put their eligibility for those benefits at risk.

These and other complications make using a POD or TOD arrangement riskier than expected.

A trust provides a great deal more protection for the person creating the trust (grantor) and their beneficiaries than a TOD. If the grantor becomes incapacitated, trustees will be in place to manage assets for the grantor’s benefit. With a TOD or POD, a Power of Attorney would be needed to allow the other person to control of the assets. The same banks reluctant to hand over a POD/TOD are even more strict about Powers of Attorney, even denying POAs, if they feel the forms are out-of-date or don’t have the state’s required language.

Creating a trust with an experienced estate planning attorney allows you to plan for yourself and your beneficiaries. You can plan for incapacity and plan for the assets in your trust to be used as you wish. If you want your adult children to receive a certain amount of money at certain ages or stages of their lives, a trust can be created to do so. You can also leave money for multiple generations, protecting it from probate and taxes, while building a legacy. If you would like to read more about a TOD or POD, and how they work, please visit our previous posts. 

Reference: Kiplinger (Dec. 2, 2021) “TOD Accounts Versus Revocable Trusts—Which Is Better?”

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TOD and POD Accounts are ways to avoid Probate

TOD and POD Accounts are ways to avoid Probate

Kiplinger’s recent article entitled “TOD Accounts Versus Revocable Trusts – Which Is Better?” explains that a TOD account typically deals with distributing stocks, brokerage accounts or bonds to the named beneficiary, when the account holder dies. A POD account is similar to a TOD account. However, it handles a person’s bank assets (cash), not their securities. Both TOD and POD accounts are quick and simple ways to avoid probate.

That can be slow, expensive, public and possibly messy. Financial institutions offer TOD and POD at their discretion, but almost all major brokerage houses and investment houses now have these types of accounts, as well as most banks for standard bank accounts. Many even let you handle this online.

The big benefit of using a POD or TOD account is probate avoidance. As mentioned, TOD and POD accounts avoid the probate process, by naming a beneficiary or beneficiaries to inherit the asset directly when the account owner passes away. These accounts can distribute assets quickly and seamlessly to the intended beneficiary.

However, when someone passes away, there can be creditors, expenses of administering the decedent’s estate and taxes owed. The person or persons responsible for administering the decedent’s estate are typically empowered under the law to seek contributions from the POD and TOD beneficiaries to pay those liabilities. If the beneficiaries don’t contribute voluntarily, there may be no choice but to file a lawsuit to obtain the contributions. The beneficiary may also have spent those assets or have other circumstances, such as involvement in a lawsuit or a divorce. Consequently, these situations will complicate turning over those assets.

A trust lets you to plan for incapacity, and if the creator of the trust becomes incapacitated, a successor or co-trustee can assume management of the account for the benefit of the creator. With a POD or TOD account, a durable power of attorney would be required to have another person handle the account. Note that financial institutions can be reluctant to accept powers of attorney, if the documents are old or don’t have the appropriate language.

A trust allows you to plan for your beneficiaries, and if your beneficiaries are minors, have special needs, have creditor issues, or have mental health or substance abuse issues, trusts can hold and manage assets to protect those assets for the beneficiary’s use. Inheritances can also be managed over long periods of time with a trust.

Although in some cases POD and TOD accounts are ways to avoid probate, their limitations at addressing other issues can cause many individuals to opt for a revocable trust. Talk to an experienced estate planning attorney to see what’s best for you and your family. If you are interested in learning more about avoiding probate, please visit our previous posts.

Reference: Kiplinger (Dec. 2, 2021) “TOD Accounts Versus Revocable Trusts – Which Is Better?”

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What a will can and cannot do

What a Will Can and Cannot Do

Everyone needs a will. A last will and testament is how an executor is named to manage your estate, how a guardian is named to care for any minor children and how you give directions for distribution of property. However, not all property passes via your will. You’ll want to know what a will can and cannot do, as well as how assets are distributed outside of a will. This was the topic of “The Legal Limits of Your Will” from AARP Magazine.

Retirement and Pension Accounts

The beneficiaries named on retirement accounts, including 401(k)s, pensions, and IRAs, receive these assets directly. Some states have laws about requiring spouses to receive some or all assets. However, if you don’t keep these beneficiary names updated, the wrong person may receive the asset, like it or not. Don’t expect anyone to willingly give up a surprise windfall. If a primary beneficiary has died and no contingency beneficiary was named, the recipient may also be determined by default terms, which may not be what you have in mind.

Life Insurance Policies.

The beneficiary designations on an insurance policy determine who will receive proceeds upon your death. Laws vary by state, so check with an estate planning attorney to learn what would happen if you died without updating life insurance policies. A simpler strategy is to create a list of all of your financial accounts, determine how they are distributed and update names as necessary.

Note there are exceptions to all rules. If your divorce agreement includes a provision naming your ex as the sole beneficiary, you may not have an option to make a change.

Financial Accounts

Adding another person to your bank account through various means—Payable on Death (POD), Transfer on Death (TOD), or Joint Tenancy with Right of Survivorship (JTWROS)—may generally override a will, but may not be acceptable for all accounts, or to all financial institutions. There are unanticipated consequences of transferring assets this way, including the simplest: once transferred, assets are immediately vulnerable to creditors, divorce proceedings, etc.

Trusts

Trusts are used in estate planning to remove assets from a personal estate and place them in safekeeping for beneficiaries. Once the assets are properly transferred into the trust, their distribution and use are defined by the trust document. The flexibility and variety of trusts makes this a key estate planning tool, regardless of the value of the assets in the estate.

Take the time to sit down with an experienced estate planning attorney who help you understand the limitations of what a will can and cannot do. If you would like to read more about wills and how they are structured, please visit our previous posts. 

Reference: AARP Magazine (Sep. 29, 2021) “The Legal Limits of Your Will”

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short-cuts in planning can have consequences

Short-Cuts in Planning can have Consequences

It seems like a simple way for the children to manage mom’s finances: add the grown children as owners to a bank account, brokerage account or make them joint owners of the home. However, these types of short-cuts in planning can have consequences for the parent’s estate and the children themselves, says the article entitled “Estate planning: When you take the lazy way out, someone will pay the price” from Florida Today.

By adding an adult child as owner to the account, the child is being given 50% ownership. The same is true if the child is added to the title for the home as joint owner. If there is more than $30,000 in the account or if the asset is valued at more than $30,000, then the mother needs to file a gift tax return—even if no gift tax is due. If the gift tax return is not filed in a timely manner, there might be a gift tax due in the future.

There is also a carryover basis in the account or property when the adult child is added as an owner. If it’s a bank account, the primary issue is the gift tax return. However, if the asset is a brokerage account or the parent’s primary residence, then the child steps into the parent’s shoes for 50% of the amount they bought the property for originally.

Here is an example: let’s say a parent is in her 80s and you are seeing that she is starting to slow down. You decide to take a short-cut and have her add you to her bank account, brokerage account and the deed (or title) to the family home. If she becomes incapacitated or dies, you’ll own everything and you can make all the necessary decisions, including selling the house and using the funds for funeral expenses. It sounds easy and inexpensive, doesn’t it? It may be easy, but it’s not inexpensive.

Sadly, your mom dies. You need some cash to pay her final medical bills, cover the house expenses and maybe a few of your own bills. You sell some stock. After all, you own the account. It’s then time to file a tax return for the year when you sold the stock. When reporting the stock sale, your basis in the stock is 50% step-up in value based on the value of the stock the day that your mom died, plus 50% of what she originally paid for the stock.

If your mom bought the stock for $100 twenty years ago, and the stock is now worth $10,500, when you were added to the account, you now step into her shoes for 50% of the stock—$50. You sold the stock after she died, so your basis in that stock is now $5,050—that’s $5,000 value of stock when she died plus $50: 50% of the original purchase. Your taxable gain is $5,450.

How do you avoid this? If the ownership of the brokerage account remained solely with your mother, but you were a Payable on Death (POD) or Transfer on Death (TOD) beneficiary, you would not have access to the account if your mom became incapacitated and had appointed you as her “attorney in fact” on her general durable power of attorney. What would be the result? You would get a step-up in basis on the asset after she died. The inherited stock would have a basis of $10,000 and the taxable gain would be $500, not $5,450.

Short-cuts in planning can have dire consequences for your loved ones. A better alternative—talk with an estate planning attorney to create a will, a revocable trust, a general durable power of attorney and the other legal documents used to transfer assets and minimize taxes. The estate planning attorney will be able to create a way for you to get access or transfer the property without negative tax consequences.

If you would like to read more about poor estate planning mistakes, please visit our previous posts. 

Reference: Florida Today (May 20, 2021) , “Estate planning: When you take the lazy way out, someone will pay the price”

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when mom refuses to get an Estate Plan

Including a POD Account in your Estate Plan

Also called a “POD” account, a payable on death account can be created at a bank or credit union and is transferrable without probate at your death to the person you name. Sports Grind Entertainment’s recent article entitled “Payable on Death (POD) Accounts” explains that there are different reasons for including a POD account in your estate plan. You should know how they work, when deciding whether to create one. Talk to an experienced estate planning attorney who can help you coordinate your investment goals with your end-of-life wishes.

The difference between a traditional bank account and a POD account is that a POD account has a designated beneficiary. This person is someone you want to receive any assets held in the account when you die. A POD account is really any bank account that has a named beneficiary.

There are several benefits with POD accounts to transfer assets. Assets that are passed to someone else through a POD account are not subject to probate. This is an advantage if you want to make certain your beneficiary can access cash quickly after you die. Even if you have a will and a life insurance policy in place, those do not necessarily guarantee a quick payout to handle things like burial or funeral expenses or any outstanding debts that need to be paid. A POD account could help with these expenses.

Know that POD account beneficiaries cannot access any of the money in the account while you are alive. That could be an issue if you become incapacitated, and your loved ones need money to help pay for medical care. In that situation, having assets in a trust or a jointly owned bank account could be an advantage. You should also ask your estate planning attorney about a financial power of attorney, which would allow you to designate an agent to pay bills and the like in your place.

If you are interested in including a payable on death account in your estate plan, the first step is to talk to your bank to see if it is possible to add a beneficiary designation to any existing accounts you have, or if you need to create a new account. Next, decide who you want to add as a beneficiary.

If you would like to learn more about POD accounts and other banking issues related to estate planning, please visit our previous posts. 

Reference: Sports Grind Entertainment (May 2, 2021) “Payable on Death (POD) Accounts”

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Information in our blogs is very general in nature and should not be acted upon without first consulting with an attorney. Please feel free to contact Texas Trust Law to schedule a complimentary consultation.
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