| Direct transfer designations, like POD's (payable on | | | | that must be probated. Probate administration and |
| death designations) and TOD's (transfer on death | | | | estate taxes must be paid, and if the probate estate is |
| designations), and simple beneficiary designations, are | | | | insufficient to do so, heirs may be required to return |
| mechanisms by which an account or other asset is | | | | cash to the estate, or property may be sold at fire |
| transferred or paid upon the death of the account | | | | sale prices to satisfy obligations. It is important to |
| holder or asset owner to a beneficiary. They are often | | | | consider that ad hoc asset level planning to avoid |
| recommended by the administrator of the account, | | | | probate often leaves assets to be probated. |
| such as a bank, broker or life insurance company. | | | | Direct Transfer Designations Do Not Plan For |
| While these can be very effective and inexpensive | | | | Contingencies |
| means by which to avoid probate and transfer assets | | | | The biggest disadvantage is that these devises are |
| at death, they are not without their risks and | | | | usually limited, and do not provide for contingencies. |
| challenges. A lack of careful consideration of the risks | | | | These plans very rarely answer the "what if?" |
| and rewards of these mechanisms can be disastrous. | | | | questions considered by a carefully prepared estate |
| A carefully prepared estate plan will consider, and | | | | plan. For example, what if the transferee or payee |
| resolve, all of the risks and challenges of these | | | | dies shortly before or after the owner? In most cases, |
| mechanisms. | | | | the designation will simply pay the estate of the |
| Benefits of Direct Transfer Designations | | | | deceased transferee or payee. If, for example, the |
| Direct transfer designations, such as POD's and TOD's | | | | payee is your son, and he dies before you, without a |
| have several benefits. The most important benefits | | | | will, the account or asset will be paid in whole or part |
| are that they are cheap and easy. Most institutions will | | | | to your daughter-in-law. You may desire that no part |
| permit you to make such designations as a service, for | | | | of your estate pass to the spouses of your children, in |
| no additional fee. They are simple to create, and there | | | | order to protect your grandchildren in the event of |
| is no need for an attorney or other professional. Most | | | | remarriage. Moreover, if you intended to avoid probate |
| of these designations are made by account owners | | | | of your assets, you may fail in your efforts. |
| without legal or professional advice or counsel. | | | | There are numerous examples of contingencies that a |
| Particularly because of this simplicity, they are very | | | | living or testamentary trust can address which are not |
| popular. | | | | typically addressed by POD's and TOD's. What if the |
| The second benefit is that the payment or transfer is | | | | property passes intentionally or unintentionally to a |
| more or less immediate and direct. Where there is a | | | | minor? Do you want the property to be distributed to |
| need to make cash or other liquid assets immediately | | | | the minor upon his or her reaching age eighteen or |
| available to a child or grandchild for some purpose, a | | | | obtaining emancipation, or would you prefer to protect |
| TOD or POD appear attractive at first glance. | | | | minors from their inexperience and lack of wisdom in |
| Beneficiary transfers, however, typically require claim | | | | managing assets? |
| forms, and documentation in support of the claim. In | | | | What if the heir has financial difficulties, lawsuits, |
| reality, the process may take more time and effort | | | | judgment liens, tax liens, or similar problems at the time |
| than succession of ownership (such as through a living | | | | of your death? If you do not intend your assets to pay |
| trust or joint tenancy with right of survivorship). | | | | the claims of third parties against your heirs, you should |
| Nonetheless, it is the assumption that funds are | | | | consider an alternative to a simple TOD or POD. |
| available immediately that often causes folks to | | | | What if your heir is undergoing a divorce, dissolution, |
| choose direct transfer designations. | | | | separation, or other marital difficulty? A TOD or POD |
| Unquestionably, direct transfers can have unique | | | | may or may not be involved in such a dispute, |
| benefits as a result of this direct payment, whether or | | | | depending upon a number of factors and your state |
| not immediate. For example, if you are widowed and | | | | law. |
| want the bulk of your estate to pass to your children, | | | | What if an heir is handicapped mentally or physically at |
| but still desire a particular asset, fund, account or | | | | the time of your death. If you want to protect that heir, |
| benefit to pass to a significant other or second spouse, | | | | you may want more than a simple TOD or POD. |
| without involvement of your children, a direct transfer | | | | What if an heir suffers from a substance abuse or |
| may be warranted. Of course, such circumstances | | | | other dependency that could affect their ability to |
| are specific, unique, and situational. The proper method | | | | manage their affairs? TOD and POD clauses rarely |
| for accomplishing an intended result depends upon first | | | | protect a family from such contingencies. |
| carefully considering all options to ensure that the | | | | What if an heir joins or becomes a member of a |
| proper tool is selected. | | | | quasi-religious organization, cult, or other organization |
| The third benefit is that a direct transfer designation | | | | pursuant to which your heir agrees to surrender or |
| may avoid probate, provided, however, that the | | | | deliver all of the heir's assets? You may not want your |
| beneficiary, transferee, or payee is alive at the death | | | | worldly possessions to facilitate or benefit a cult. |
| of the account holder or owner. If the beneficiary | | | | What if there is a dispute, contest, or lawsuit? How is |
| passes before or after, the asset may be probated. | | | | the dispute to be resolved, and on what basis? |
| Particularly because the avoidance of probate may | | | | Regardless which "what if" question concerns you |
| not be effective, TOD's and POD's are of limited utility | | | | now, you should consider many possible contingencies. |
| in a carefully planned estate. Not surprisingly, because | | | | As a result, a carefully considered and well drafted |
| they are available at little or no cost, they are often | | | | estate plan will consider and provide solutions to all of |
| used for the sole purpose of avoiding probate as an | | | | these and many more. TOD's and POD's simply have |
| inexpensive substitute for more comprehensive | | | | no solutions, because they are not, in and of |
| planning. Make no mistake that these devices are NOT | | | | themselves, "plans." |
| substitutes for living trusts. If you have utilized TOD's or | | | | Direct Transfer Designations Can Lead to Unintended |
| POD's in your estate plan, particularly if you have done | | | | Disinheritance |
| so without professional guidance, you may want to | | | | Another disadvantage of direct transfers is that they |
| consider carefully the many possible disadvantages of | | | | can lead to unintended disinheritance. This occurs |
| these tools, and consider a more appropriate planning | | | | because folks often use these to segregate accounts. |
| technique. | | | | In other words, a person will select one account with a |
| Regardless, these designations do not, at least | | | | TOD or POD designation for one heir, and another |
| effectively, accomplish several goals that might be | | | | account for another heir. This is often done to keep |
| accomplished by proper estate planning. For example, | | | | confidential account balances which may favor one |
| these devices do not avoid estate taxes, reduce the | | | | heir as against another. These can be disastrous in an |
| risk of guardianship, or permit management of assets | | | | estate plan. Consider the following example: |
| during periods of incompetency or incapacity, and may | | | | Widow Smith has three children and three CD's. Two |
| not even avoid probate of the asset. | | | | CD's are worth ten thousand dollars, but the third is |
| Moreover, there are several potential drawbacks to | | | | worth twenty five thousand dollars. Smith's oldest |
| such devices, particularly if they are used without | | | | daughter lives very near, is often helpful in Smith's |
| careful consideration or the advice of counsel. The | | | | day-to-day activities, and is Smith's designated |
| biggest drawback to these plans is that they do not | | | | attorney-in-fact. Smith makes the larger CD payable |
| plan for contingencies. Additionally, use of such | | | | upon death (POD) to the oldest daughter, but makes |
| designations can cause illiquid estates, can lead to or | | | | the others payable to the other children. Unfortunately, |
| cause unintended disinheritance, can lead to lawsuits or | | | | Smith suffers a stroke and undergoes lengthy period |
| disputes, and can facilitate or encourage guardianship. | | | | of convalescence, including a stay in a nursing home. |
| The limitations to such planning devices are discussed | | | | The expenses require the daughter, now acting |
| further below, followed by a discussion of their | | | | through power of attorney, to liquidate one of the |
| potential disadvantages. | | | | smaller CD's, and to liquidate the larger CD to cash, of |
| Direct Transfer Designations Do Not Avoid Estate | | | | which she spends ten thousand dollars. Assuming the |
| Tax | | | | only assets remaining at Smith's death are the |
| If you have any incident of ownership in or to an | | | | checking account, which is now worth only |
| account or other asset, it will be included in your | | | | approximately 15 thousand dollars, and the remaining |
| taxable estate for estate tax purposes. Consequently, | | | | CD which is worth ten thousand dollars, you can see |
| direct transfer designations are not appropriate tools | | | | how the POD failed to effectuate her wishes. The |
| for estate tax planning, if your intention is to remove | | | | checking account is divided equally between the |
| the value of the asset from your taxable estate. | | | | children (5 thousand dollars each) (Widow Smith |
| Generally, unless some other reason for excluding the | | | | probably assumed like many people that the checking |
| account exists, the account will be included in your | | | | account will only have a nominal amount of money in |
| taxable estate notwithstanding the direct transfer | | | | the account, which may not be true as the family |
| designation. | | | | deals with medical or other crises). Therefore instead |
| POD's and TOD's May Not Avoid Probate | | | | of the oldest daughter receiving twenty five thousand |
| There are numerous instances where these | | | | dollars, she receives only five thousand. One of the |
| techniques have been used to avoid probate, and yet | | | | other children receives fifteen thousand dollars. It is |
| the assets of the estate were nonetheless probated. | | | | obvious the results were not in keeping with the |
| Transfer upon death designations are not typically | | | | intentions of Widow Smith. |
| made for personal property, and may in fact be | | | | An Attorney-in-Fact May Change Your Wishes |
| unavailable to transfer such assets. Under recent Ohio | | | | Most people who have utilized direct transfer |
| law, a transfer upon death deed was unavailable for | | | | designations assume that their estate plan is set, and |
| real property that was owned jointly with a right of | | | | their wishes will be followed. Sadly, nothing could be |
| survivorship, as is most real property owned by a | | | | further from the truth. A direct transfer designation is |
| husband and wife. Regardless, if there are sufficient | | | | typically a contractual right, which can be changed by |
| assets to probate, the other assets will pass through | | | | an attorney-in-fact. Moreover, an asset can be |
| probate, even if liquid or other property avoids probate. | | | | transferred, and the designation "undone" by any |
| Moreover, these designations do nothing to protect | | | | person with authority over you or your estate, such as |
| assets from administration by a guardian or | | | | a guardian or conservator. Bottom line? A beneficiary |
| conservator in the event of incompetence or | | | | designation is simply not an adequate estate plan for |
| incapacity. They also do not prevent challenges to a | | | | most people. |
| will, appointment of executor, or other legal disputes | | | | Direct Transfer Designations May Lead to Lawsuits Or |
| which may ultimately be resolved by the probate court. | | | | Disputes |
| Finally, these designations will not avoid probate if the | | | | For all of the foregoing reasons, and countless others, |
| beneficiary passes away either before or after the | | | | direct transfer designations may cause your estate to |
| account or asset owner. A probate administration may | | | | be disputed, and may encourage, rather than |
| be necessitated, whereas property passing by way of | | | | discourage lawsuits and litigation. There is no substitute |
| trust will not need to be probated in the event of a | | | | for a carefully considered and well drafted trust to |
| death of an heir. | | | | ensure that your wishes are expressed and carried |
| Direct Transfer Designations Do Not Avoid | | | | out. |
| Guardianship | | | | Direct Transfer Designations May Facilitate or |
| Direct transfer designations do nothing to protect | | | | Encourage Guardianships |
| assets from administration by a guardian or | | | | Particularly because they may create expectations in |
| conservator in the event of incompetence or | | | | the minds of heirs, and because their use certainly |
| incapacity. For more information regarding the danger | | | | does not discourage, and may encourage disputes, |
| of guardianship, consider he Open Letter to Congress, | | | | reliance on these in your estate plan might even |
| drafted by the National Association to Stop Guardian | | | | encourage a guardianship application by an otherwise |
| Abuse. | | | | well-meaning heir as he or she seeks to protect their |
| Direct Transfer Designations May Create Illiquid | | | | inheritance from others. |
| Probate Estates | | | | Guardianship may be necessitated by assets passing |
| One potential drawback to these designations, | | | | to contingent beneficiaries, as well, such as underage |
| particularly when placed on all liquid checking, savings, | | | | grandchildren. Since the goal of such designations is, in |
| and investment accounts is that an estate can be | | | | part, avoidance of probate, carefully consider their use |
| made illiquid. Lack of liquidity can be a problem where | | | | in an estate plan. |
| there is real estate, personal property, or other assets | | | | |