Transfer on Death (TOD) and Payable on Death (POD) designations are methods by which individuals can pass assets directly to heirs without going through probate. While these designations offer some advantages, they also come with potential disadvantages. Here's an overview:
Advantages and Considerations:
Avoidance of Probate:
TOD and POD designations enable assets to bypass the probate process, providing a quicker and more straightforward transfer to heirs.
Avoid federal gift tax paperwork:
Giving away property while alive may count as a gift in the eyes of the IRS and may require the giver to file a gift tax return. TOD deeds may avoid this by transferring the property after you die.
Privacy:
Probate proceedings are public, but TOD and POD designations allow for a more private transfer of assets since they occur outside the probate court.
Simplicity:
Setting up TOD and POD designations is generally a simple process. It often involves completing a form with the financial institution holding the asset.
Immediate Access:
Heirs gain immediate access to the designated assets upon the account holder's death, helping with immediate financial needs.
Revocability:
Until the account holder's death, TOD and POD designations are usually revocable. The account owner can change beneficiaries or cancel the designation as needed.
Disadvantages and Considerations:
Limited Control During Lifetime:
Once TOD or POD designations are in place, the account owner relinquishes control over the assets upon their death. This lack of control may be a disadvantage if circumstances change.
Unintentional Disinheritance:
If the owner doesn't update the transfer on death deed after the birth of a new child or grandchild, someone might be excluded inadvertently when the owner dies.
No Contingency Planning:
TOD and POD designations do not account for contingencies such as the simultaneous death of the account owner and the designated beneficiary. Proper contingent arrangements may be needed.
Equal Distribution:
Some states require TOD and POD designations to distribute assets equally among named beneficiaries, which might not align with the account owner's wishes if a different distribution is desired.
Creditor Claims:
Assets passing through TOD or POD designations may be subject to creditor claims against the deceased account owner, potentially affecting the beneficiaries' inheritance.
Tax Implications:
The tax implications of using TOD and POD designations can vary. Understanding the potential impact of income tax, estate tax, and capital gains tax is essential.
Increased Risk of Inconsistency When Compared to Estate Planning Documents:
Things can get tied up in probate courts if the transfer on the death deed indicates that a property should go to one person, but the will says it should go to someone else.
Potential for Disputes:
If there are disagreements among heirs or ambiguity in the designations, disputes may arise, potentially leading to legal challenges.
Ineligibility for Minor Beneficiaries:
TOD and POD designations may not be suitable for minor beneficiaries. If a minor is named, a custodian or trustee may need to be appointed, adding complexity.
Not Comprehensive Estate Planning:
Relying solely on TOD and POD designations may not address all aspects of comprehensive estate planning, such as incapacity planning or providing for individuals with special needs.
TOD and POD designations can be helpful tools for avoiding probate and streamlining the transfer of certain assets. However, they should be part of a broader estate planning strategy that considers the specific needs and goals of the account owner and their beneficiaries. Consulting with your financial and estate planning professionals can help ensure that all aspects of your estate plan are appropriately addressed.