How can you avoid Probate? Part II, Beneficiary Designations
Advice from a Montana Probate Lawyer
Beneficiary Designations or Transfer-on-Death (T.O.D), Payable-on-Death (P.O.D) Designations
Over the next several weeks, I will be posting a series of entries regarding methods for avoiding the probate process. For a more general overview of probate avoidance methods, see Part I of this series. Today’s blog post focuses on beneficiary designations.
Payable-on-Death & Transfer-on-Death Accounts
Payable on Death Accounts (P.O.D/ T.O.D Accounts) are specific types of accounts that you set up with your bank or financial institution where you name another individual to inherit the money in your account upon death. While you are alive these accounts are treated like a normal bank account. The person you have designated to inherit the money does not have any rights to the account during your lifetime; you may spend or transfer money, close the account or do anything else you could have with a regular account. However, upon your death, any funds remaining in the account belong to the person(s) named on the account. That individual simply needs to go to the bank and provide documentation of his or her identity and proof of death, then he or she can take out all of the remaining funds in the account.
Typically setting up a P.O.D. or T.O.D account is fairly easy. Most banks or financial institutions will provide a you with a simple form to fill out where you name the person you want to inherit the money in the account upon your death. Payable-on-death accounts are the designations used for bank accounts and transfer-on-death designations are used for securities such as stocks or bonds.
Other Beneficiary Designations
For other assets such as your retirement, 401(k) accounts or life insurance you need to name a beneficiary for the account. Beneficiary designations for other assets work much like payable-on-death designations and the funds remaining in the account upon your death will pass directly to the name beneficiary upon your death.
There are some very specific rules that apply to beneficiary designations for your retirement accounts. Mainly, if you are married your spouse will likely be entitled to inherit the money from your retirement account regardless of the named beneficiary. When dealing with your retirement accounts it is important that you always seek advice from your attorney, cpa or financial advisors.
Advantages & Disadvantages of Designating Beneficiaries for Your Accounts
The advantage of beneficiary designations for your financial accounts is that you can avoid probate, at least for these assets. Additionally, you may change the person you designate as the beneficiary at any point in time.
However, there are disadvantages to relying on beneficiary designations (including T.O.D. and P.O.D accounts) to transfer assets upon your death. Mainly, you cannot control the manner in which these accounts are managed after your death or the manner in which the funds are distributed to the beneficiary.
Say, for example, you wanted your bank account to transfer to one of your children upon your death. However, you wanted that child to receive the money in several different installments over time, instead of all outright at once. You may not trust that your child can manage these funds effectively or budget appropriately. If you set up your bank account with a payable on death designation, then the account would automatically transfer to your child upon your death all at one time. The beneficiary designation does not allow for installment distributions, or any other control mechanisms after your death.
Moreover, while beneficiary designations can be a useful estate planning tool, they are only applicable for financial assets. While there are some mechanisms to transfer real property upon your death, you cannot simply add a beneficiary for your real property in Montana. So, if you own your own home, you would need to utilize another method to transfer your home upon death to avoid probate such as a trust.
The best way to transfer these assets while avoiding probate would be through a revocable living trust. Revocable living trusts are important estate planning tools, but trusts are not for everyone. I will discuss trusts in more detail in my later posts. However, if you set up a trust correctly you can avoid probate all together. Regardless, it is important to discuss your options and specific situation with a Montana estate planning attorney.
To learn more about trusts or other mechanisms for avoiding probate in Montana call me in Kalispell at (406) 752-6373