Estate Planning - Property That Does Not Pass Via a Will

By filling out a simple form at your bank, credit union and/or savings and loans institution, you can name the person you want to inherit the money in your accounts at your death. The person you name to inherit your money in a POD account has no rights to it until you die. Until then, you can continue to spend your money as you please, name a new Beneficiary, or close the account.

Some POD agreements also allow access to certificates of deposit (CDs) and other securities that are associated with any accounts established with the bank and in the name of the primary account holder. Policies regarding securities may vary from state to state.

POD bank accounts are sometimes referred to as “poor man’s trusts” because they do essentially the same thing that a lawyer-drawn Trust does, but for free. They are also called Totten Trusts, Testamentary Trusts or “informal trusts”, although they are not an actual type of Trust at all.

One negative associated with this type of arrangement is that you cannot name alternate Beneficiaries on one account. There is also the possibility of a delay in accessing the account funds if there are pending tax issues.

Some states and banks have different names for POD bank accounts. They are also referred to as Totten Trusts. In addition, some states have additional regulations in place to help protect POD bank accounts. Some have strict rules set up to change the Beneficiary of a POD bank account. Others limit what you can do with the funds while they are kept in the POD bank account.

To take possession of his/her inheritance after your death, your Beneficiary simply needs to go to your bank, show proof of your death and of his/her identity. The probate court need not be involved.

Bear in mind, if you are married and have a joint account with your spouse, the money in the account will generally pass to your surviving spouse at your death, under right of survivorship.

If they meet the following requirements, POD accounts are insured by the Federal Deposit Insurance Corporation (FDIC) separately from single ownership accounts and joint accounts of the owner or Beneficiary.

• The named Beneficiary must be the account owner’s spouse, child, or grandchild, parent or sibling. Stepparents, stepchildren, adopted children and similar relationships also qualify.
• The account owner’s intention that, upon his/her death, the account funds be passed to the Beneficiary must be reflected in the account title. i.e. in trust for (ITF), as trustee for (ATF), or payable on death (POD).
• The Beneficiary must be specifically identified by name in the deposit account records of the banking institution.

If the account meets these requirements, the FDIC insures it for up to $250,000 for each qualifying Beneficiary.

You name a Beneficiary for your retirement plan when you first open it, and usually an alternate or secondary beneficiary as well. If you are single, you can choose whomever you wish as your Beneficiary. If you are married, your spouse probably has legal rights to some or all of the funds.

If you have a 401(k) account, your spouse is entitled to inherit any remaining funds at your death, unless he/she agrees, in writing, to your selection of a different Beneficiary. And, as discussed above, if you live in a community property state, your spouse likely owns half of your retirement account as community property.

After your death, any funds left in your retirement account can pass directly to your Beneficiary without going through probate. The Pension Protection Act of 2006 allows non-spouse Beneficiaries to inherit employer-sponsored retirement plans, allows them to transfer the assets to a properly titled Inherited IRA maintained in the same name as the decedent. This way, the assets can continue compounding on a tax-deferred basis and continue to grow.

A stretch IRA allows a named Beneficiary to spread the IRA distributions over the Beneficiary’s life expectancy, as long as it is an individual Beneficiary, not a Trust, for example.

The Uniform TOD Securities Registration Act allows you to name someone to inherit your stocks, bonds, mutual fund shares, security accounts or brokerage accounts without probate. It works similar to a POD bank account. When you register your ownership, you make a request to take ownership in “beneficiary form.” When the papers showing your ownership are issued, they will also reflect the name of your Beneficiary.

As in a POB bank account, your named Beneficiary has no rights to your stocks while you are alive. But after your death, can claim the securities without going through probate. TOD Beneficiaries will need to re-register the securities in their own names, usually by simply providing a copy of the death certificate and an application for re-registration to the transfer agent.

These are also referred to as Totten Trusts.

State law governs the way securities may be registered in the names of their owners. All states, but Louisiana, have adopted the Uniform Transfer-on-Death Securities Registration Act.

TOD vehicle registration allows you to name a Beneficiary on your certificate of registration to inherit your vehicle after your death. To take advantage of this option, when you register your vehicle, you do so in “beneficiary form.” The new registration certificate will list the name of your Beneficiary, who will automatically own the vehicle after your death.

Not all states offer this option; only Arizona, California, Connecticut, Indiana, Kansas, Missouri, Nevada, Ohio and Vermont currently participate.

Your named Beneficiary has no rights to the vehicle while you are still alive. After your death, your Beneficiary would present a copy of the death certificate to get the vehicle titled in his/her name.

For more information, check with your state’s motor vehicle department website. You can find links to these here. Simply select the state, and then the appropriate agency under the Executive Branch section.

TOD Deeds allow you to prepare a deed now but have it take effect upon your death. It must expressly state that it does not take effect until death. These TOD deeds must be prepared, signed, notarized and recorded just like a regular deed. Unlike regular deeds, though, you can revoke a TOD deed.

Only a few states offer this option; currently Arkansas, Arizona, Colorado, Indiana, Kansas, Minnesota, Missouri, Montana, Nevada, New Mexico, Ohio, Oklahoma and Wisconsin. Check your state’s statute for rules. Many of the statutes provide deed forms.

Joint tenancy basically means co-ownership. Property owned in joint tenancy automatically passes, without probate, to the surviving owner(s) when one owner dies. It’s also referred to as joint tenancy with right of survivorship (JTROS). This is often a good arrangement for couples who own real estate, vehicles, bank accounts, securities or other valuable property together.

State law controls the creation of a joint tenancy in both real and personal property. Joint tenancy can be created in almost any type of property. To create a joint tenancy, certain conditions, known as unities, must be met. They are called the four unities and must be shared by the joint tenancy co-owners.

• Unity of interest – both parties must have the same rights to the property.
• Unity of possession – both parties must be allowed possession of the entire property. Neither co-owner is able to exclude the other.
• Unit of time – both parties must receive the title at the same time.
• Unit of title – both parties receive title on the same document, such as a deed.

In Texas a separate written agreement is also required to set up joint tenancy.

If there is a Will, the right to survivorship in a joint tenancy will supersede what’s stated in the Will. If the Will contains a clause to break or end a JTROS and give the property to another, this will not be legal.

A joint tenancy can be broken or terminated rather easily by destroying one of the four unities. If one co-owner takes action that doesn’t follow the rules of a joint tenancy, such as selling his/her share of the property, then the joint tenancy will be terminated and tenancy in common is created instead.

Situations in Which You Should Avoid Joint Tenancy:

This is not a good option for everyone though. While it’s fine for couples who already own property together, it is not advisable for someone to put their property into a joint tenancy with someone else for the sole purpose of passing the property on without probate after death. This would result in you giving away half ownership of your property while you are still alive. Here are some reasons that joint tenancy might not be right for you.

• You don’t want to lose control of your property and/or assets.
• Your co-owner has creditors who may come after the money.
• There are doubts about the stability of the relationship with your co-owner or you’re in a shaky marriage.
• You are using joint tenancy as a Will substitute.
• It might cause confusion and/or conflict among surviving family members.
• It won’t speed up the transfer of assets after your death.
• It adversely affects tax planning, or raises taxes.
• You don’t want to transfer your assets all at once.

In some states married couples take title in “tenancy by the entirety.” It is similar to joint tenancy but can only be utilized by married couples. Both types of tenancy avoid probate in the same manner. Tenancy by the entirety has the right of survivorship as well. If the couple divorces, however, the tenancy converts to a tenancy in common and there is no longer a right to survivorship.

When you name Beneficiaries other than your estate or a Trust, on your life insurance policy, the money passes to your Beneficiaries directly, without probate. This allows your beneficiaries to access cash after your death in a relatively short timeframe. When deciding on the amount of Life Insurance you should purchase, consider the following factors.

• Cost of Death - Funeral, burial and hospital bills.
• Replacing Lost Income – experts counsel that a family needs 75% of the former wage earner’s after-tax income after he/she dies to maintain their standard of living.
• Grief Fund – this can afford you family members a temporary grieving period, allowing them to hold off from returning to work immediately after your death.
• Educational expenses – life insurance proceeds can be used to set up college fund(s) for your child(ren).
• Mortgage-canceling life insurance – this type of insurance will pay off your mortgage when you die.
• Emergency fund – this can be an additional few thousand dollars for your family to put aside for unexpected emergencies.

Although life insurance benefits pass to your Beneficiary income tax free, if you own the policy when you die, your estate may have to pay estate taxes on the total amount left to your Beneficiary. For large estates this can have a big impact. An option to avoid this is to have your children own the policy, making gifts to them each year to pay the annual premium.

For large estates gifting can be a viable option. Individuals can give away up to $1 million during their lifetime without incurring federal gift taxes. In addition, one can give away an annual amount without reducing their exemption for gift or estate taxes.

While remaining within the annual individual gift exclusion amount (currently $13,000 per individual recipient), you would gift amounts out to heirs in sufficient amounts to keep your estate below the current estate tax threshold. Although the Federal Estate Tax was repealed in 2010, it’s scheduled to return next year with a lower exemption of only $1 million and a higher tax rate.