We see it every day. A couple walks in and tells us that they already have an estate plan and they want us to give it a quick review and stamp of approval. They bought an “I Love You Will” on-line or had their neighborhood Jack-of-All-Trades attorney fill out a couple page Will for a few hundred bucks (Bad Idea #1) . That nice attorney even tucked away the original wills in a fireproof safe to protect it from destruction. (In reality, this is all about the attorney getting the first bite of the probate apple fees when they pass away – RED FLAG). The couple then talked to a neighbor and realizes that the Will they just purchased does NOTHING to avoid estate taxes, long-term care costs and probate expenses. So what do they do next??? They hear from this same neighbor about using “designations” to avoid probate. The next thing you know, the couple slaps a Transfer on Death (“TOD“) or Payable on Death (“POD“) designation on everything they own – real property, bank accounts, vehicles, etc. (Bad Idea #2)
Unfortunately, these type of Designations are meant to be used as one of the many tools for a Comprehensive Estate Plan, NOT as the entire Estate Plan. Below are the TOP TEN Issues, Misconceptions and Downfalls of relying on TOD & POD Designations for your stand-alone Estate Plan.
- Liquidity – one of the most common and costly mistakes of relying on TOD & POD designations is that they create and estate that now has no liquidity to pay for expenses, probate costs or taxes. Basically, all of the cash in the accounts was transferred to the kids. The result is paying an attorney to seek out beneficiaries to return assets which could end up costing the estate much more than if estate actually went through probate!!!
- Probate Avoidance – most personal property can not be assigned via Designation so if sufficient personal property exists, a probate estate will need to be opened anyways (as opposed to a trust which could transfer such personal property and avoid probate).
- Estate Tax – TODs & PODs do NOT avoid estate tax.
- No Contingency Plan – using Designation affords NO flexibility regarding “what if scenarios???” What if beneficiary gets a divorce or predeceases you? Does it go to their spouse or your grand kids? What if an account transfers to a minor or incapacitated person?
- Disinheritance – how can you ensure that your children receive equal shares if multiple Designations exist on numerous accounts that all have different named beneficiaries?
- Real Property – under Ohio law, you can have a TOD on real property. However, what most people do not realize is that you can NOT name “your children” or use other broad/generalized distribution language. You can only name specific beneficiaries and if such beneficiary predeceases you then the property will need to go through probate.
- Power of Attorney – unlike a trust, which disallows certain changes after incapacitation, a TOD or POD can typically be changed by your Power of Attorney to alter your beneficiaries and wishes.
- Lost Benefits – when used as a stand-alone method of planning, many other important items can slip through the cracks (healthcare directives, long-term care asset protection and tax planning).
- Guardianship/Conservatorship – Designations do nothing to protect against administration of your assets via Guardianship/Conservatorship if you are incapacitated.
- Contests – given all the things that can go wrong, you can probably imagine that these types of Designations are regularly challenged and fought over due to their lack of specificity regarding contingency scenarios or unequal distributions amongst children.
Do yourself a favor. Before you hop online and re-title every asset you own with a TOD or POD designation, sit down and talk to an attorney who focuses on Estate Planning to discuss your goals. Get pointed in the right direction. In certain circumstances, TOD & POD designations are a tool, but they should NOT be the only tool. Take a moment to protect and plan for the assets and legacy you took a lifetime to build.
A Lifetime Accumulating Wealth, An Afternoon Preserving It
