Payable on Death and Transfer on Death Accounts

When it comes to estate planning, many people have the objective of helping their loved ones avoid the lengthy and public probate process. Importantly, there are a number of tools that can be used to transfer assets directly to your loved ones upon your passing. Setting up a payable on death (POD) account or transfer on death (TOD) account is a way that this can be accomplished.

What Are Payable on Death and Transfer on Death Accounts?

Without proper estate planning, an individual’s assets would need to go through the probate process before they could be passed to their loved ones when they die. This process can be time consuming, costly, and take many months to finalize. However, if you wish for a specific individual to receive your assets and avoid the probate court process, you might consider adding a “payable on death” designation to your bank account or a “transfer on death” registration to a brokerage account.

Under Michigan law, a payable on death account allows a beneficiary of your choosing to be able to receive the assets it contains immediately. There is typically no court involvement when a beneficiary designation is added to a bank account, checking account, or savings account — all that is required to take control of the assets is a copy of the original death certificate.

Similarly, with a transfer on death registration for securities, the named beneficiary will inherit the stocks or bonds automatically at the time of your passing. Rather than go through the probate process to obtain the securities, the beneficiary would work directly with the brokerage firm to re-register the securities in their name. Usually, this involves sending the death certificate and submitting an application for re-registration.

What are the Advantages of Creating a Payable on Death or Transfer on Death Account?

A payable on death account or transfer on death account can be an easy way to keep your assets out of probate. This can help to ensure your financial affairs remain private after your passing. Your loved ones may also be able to avoid the stress that can often come with the probate process.

Some of the advantages of setting up a payable on death account or registering a transfer on death account include the following:

  • They are economical and easy to create

  • There is no limit on the amount of money that can be left to your beneficiary

  • The process of accessing assets is easier and faster for the beneficiary

  • You maintain control of the assets in the accounts during your lifetime

  • Your beneficiaries can be provided with immediate access to funds for things like funeral and burial expenses

Significantly, during your lifetime, a beneficiary has no rights to the assets in the account — you are free to withdraw the money, spend it, or even close the account. You can also change a designated beneficiary at any time.

Drawbacks of POD and TOD Accounts

Although a payable on death account is easier to create and maintain than a will or trust, it’s important to consider any potential disadvantages or unintended consequences. POD and TOD accounts can come with various limitations. For instance, if the beneficiary you name has special needs and depends upon Medicaid or Supplemental Security Income, receiving a large amount of assets could adversely impact their eligibility for public benefits. In such cases, it may be best to instead set up a special needs trust.

In addition, if all or most of your assets are in a POD and TOD accounts, there may not be sufficient assets left in the estate to pay your debts. This means that creditors may have a right to make a claim against a POD or TOD account to satisfy the debt they are owed. Estate and inheritance taxes would also be due from these accounts if the distribution could not be made from money in the estate.

Another potential drawback of a POD or TOD account concerns a beneficiary receiving a lump sum payment. If your beneficiary is a minor or not mature enough to handle a substantial amount of assets, they may quickly deplete their inheritance or use it for purposes you had not intended. In contrast, a trust can allow you to have control over when a beneficiary receives funds and the amount they will receive with each distribution.

While a payable on death or transfer on death account can seem like an easy solution, your objectives should be carefully considered before setting one up. Even if your institution allows you to include multiple beneficiaries on the account, it might also require that they receive equal distributions. This may not always reflect your wishes. Additionally, with these types of accounts, you cannot specify how the assets are to be used once a beneficiary receives their distribution — there can also be complications depending on how beneficiaries are listed.

Due to the various potential issues that can come with POD and TOD accounts, they are not usually advised by attorneys. Because they are structured and specifically tailored, wills and trusts can serve as more effective estate planning vehicles to ensure your wishes are met.

Contact an Experienced Michigan Estate Planning Attorney

Payable on death accounts and transfer on death accounts can be useful estate planning tools. However, to ensure your wishes are carried out, it is best to consult with an attorney who can assist you with developing a thorough and comprehensive estate plan that will provide you with the peace of mind you need — and address all possible scenarios that could arise.

The skillful estate planning attorneys at Barron, Rosenberg, Mayoras & Mayoras are committed to providing high-quality legal services for a wide variety of estate planning matters. Schedule a consultation today by calling (248) 213-9514 in Michigan or (941) 222-2199 in Florida to learn how we can assist you. You can also use our simple online contact form.

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