Do TOD Accounts Mean I Don’t Need an Estate Plan?

Many people incorporate a TOD, or “Transfer on Death” into their financial plan, thinking it will be easier for their loved ones because it will avoid probate.  They often do this at the suggestion of bankers or financial professionals, and they believe it avoids the need for having a trust or even a will.  However, the article “TOD Accounts Versus Revocable Trusts—Which Is Better?” from Kiplinger explains how it really works.

The TOD account allows the account owner to name a beneficiary on an account who receives funds when the account owner dies. The TOD is often used for stocks, brokerage accounts, bonds and other non-retirement accounts, and is akin to having a beneficiary named on the account.  It’s worth pointing out that I’m using TOD as a general term here, the specific term might be different for different types of assets.  For example, a POD, or “Payable on Death,” account is usually used for bank assets—cash.  You can find more information about pitfalls of beneficiary designations here.  https://galligan-law.com/common-mistakes-made-on-beneficiary-designations/ 

The chief goal of a TOD or POD is to avoid probate. The beneficiaries receive assets directly, bypassing probate, keeping the assets out of the estate and transferring them faster than through probate. The beneficiary contacts the financial institution with an original death certificate and proof of identity.  The assets are then distributed to the beneficiary. Banks and financial institutions can be a bit exacting about determining identity, but most people have the needed documents.

There are pitfalls. For one thing, the executor of the estate may be empowered by law to seek contributions from POD and TOD beneficiaries to pay for the expenses of administering an estate, estate and final income taxes and any debts or liabilities of the estate. If the beneficiaries do not contribute voluntarily, the executor (or estate administrator) may file a lawsuit against them, holding them personally responsible, to get their contributions.

If the beneficiary has already spent the money, or they are involved in a lawsuit or divorce, turning over the TOD/POD assets may get complicated. Other personal assets may be attached to make up for a shortfall.

Very frequently, naming a TOD/POD beneficiary in an estate that otherwise expects to go through probate (i.e. a will-based estate plan) leads to having non-liquid assets such as a house which cost money to administer, and no money with which to do so.

If the beneficiary is receiving means-tested government benefits, as in the case of an individual with special needs, the TOD/POD assets may put their eligibility for those benefits at risk.  This is a very, very common problem when a loved one has a disability.

Very simply too, beneficiaries under TOD/POD accounts can predecease an owner with no meaningful way to handle contingencies.  If that happens, the asset will be subject to probate which will negate their advantage, and may not go to the proper beneficiaries.  Utilizing trusts can solve that problem.

These and other complications make using a POD/TOD arrangement riskier than expected.

A trust provides more benefit to the trustor (creator of the trust) and in fact can work in conjunction with TODs as part of a complete, integrated plan.  Trusts address control of assets upon incapacity because trustees will be in place to manage assets for the trustor’s benefit. With a TOD/POD, a Power of Attorney would be needed to allow the other person to control of the assets. The same banks reluctant to hand over a POD/TOD are even more strict about Powers of Attorney, even denying POAs, if they feel the forms are out-of-date or don’t have the state’s required language.  People often don’t think of trusts as part of incapacity planning, but this is often a benefit to a trust-based plan.

Similarly, trusts (whether an asset named the trust as beneficiary of a TOD/POD or if it owns the assets themselves) can address contingencies.  So, if a beneficiary has a disability, potential divorce, creditors, predeceases the owner, or virtually any other reason for them not to directly receive money, the trust can provide for what happens under all of those contingencies.

Creating a trust with an experienced estate planning attorney allows you to plan for yourself and your beneficiaries, and if you chose to avoid probate, to do so in a way that will work for all of your assets and to avoid problems created by solely using TOD/POD accounts.

Reference: Kiplinger (Dec. 2, 2021) “TOD Accounts Versus Revocable Trusts—Which Is Better?”

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Estate Planning for Blended Families

When a couple in a blended family fails to address what will happen after the first spouse dies, families often find themselves embroiled in disputes.  According to the article “In blended families, estate planning can have unintended issues” from The News-Enterprise, this is more likely to occur when spouses marry after their separate children are already adults, don’t live in the parent’s home and have their own lives and families.

In this case, the spouse is seen as the parent’s spouse, rather than the child’s parent. There may be love and respect. However, it’s a different relationship from long-term blended families where the stepparent was actively engaged with all of the children’s upbringing and parents consider all of the children as their own.

For the long-term blended family, the planning must be intentional. However, there may be less concern about the surviving spouse changing beneficiaries and depriving the other spouse’s children of their inheritance. The estate planning attorney will still raise this issue, and the family can decide how important it is to them.

When relationships between spouses and stepchildren are not as close, or are rocky, estate planning must proceed as if the relationship between stepparents and stepsiblings will evaporate on the death of the natural parent. If one spouse’s intention is to leave all of their wealth to the surviving spouse, the plan must anticipate trouble.

One very common approach to this issue is to set up a trust for the surviving spouse, which is often called a marital trust.  This establishes a trust for the benefit of the spouse, but whatever remains in the trust will go to the deceased spouse’s beneficiaries.  So, you can have your spouse benefit from your money, but make sure what’s left goes to your kids.

In some families, there is no intent to deprive anyone of an inheritance. However, failing to plan appropriately—having a will, setting up trusts, etc.—is not done and the estate plan disinherits children.

It’s important for the will, trusts and any other estate planning documents to define the term “children” and in some cases, use the specific names of the children. This is especially important when there are other family members with the same or similar names or perhaps a lack of clarity as to who the children are.

In Texas, this issue is even bigger when you don’t have an estate plan for a blended family.  If the decedent raised a stepchild in their home, they could potentially be considered a child of the decedent through adoption by estoppel.  If that’s true, then they are a child as far as the estate is concerned.

As long as the parents are well and healthy, estate plans can be amended. If one of the parents becomes incapacitated, changes cannot be legally made to their wills. If one spouse dies and the survivor remarries and names a new spouse as their beneficiary, it’s possible for all of the children to lose their inheritances.

Most people don’t intend to disinherit their own children or their stepchildren when estate planning for blended families. However, this occurs often when the spouses neglect to revise their estate plan when they marry again, or if there is no estate plan at all. An estate planning attorney has seen many different versions of this and can create a plan to achieve your wishes and protect your children.

It also makes sense to consider the children’s role in your finances as you age as the blended family situation may complicate the matter.  See this article where I addressed that more specifically.  https://galligan-law.com/the-blended-family-and-issues-with-finances-and-estate-planning/  

A final note: be realistic about what may occur when you pass. While your spouse may fully intend to maintain relationships with your children, lives and relationships change. Clients often struggle to confront this or admit it to themselves, but I assure you it comes out later, and we can plan better when all of the issues are addressed.  With an intentional estate plan, parents can take comfort in knowing their property will be passed to the next generation—or two—as they wish.

Reference: The News-Enterprise (Dec. 7, 2021) “In blended families, estate planning can have unintended issues”

 

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Can You Refuse an Inheritance?

It’s a bit of a strange thought, but occasionally there are reasons for people not to want their inheritance.  They may have expected the money to go to someone else and want to facilitate that, they may feel they have enough money and want it to pass to someone else, or perhaps they are concerned about taxes.  Whatever, the reason, no one can be forced to accept an inheritance they don’t want. However, what happens to the inheritance after they reject, or “disclaim” the inheritance depends on a number of things, says the recent article “Estate Planning: Disclaimers” from NWI Times.

A disclaimer is a legal document used to disclaim the property. To be valid for at least most tax purposes, the disclaimer must be irrevocable, in writing and executed within nine months of the death of the decedent. You can’t have accepted any of the assets or received any of the benefits of the assets and then change your mind later on.  Basically, you can’t receive the assets, and then decide to give them back as though you didn’t want them in the first place.

Once you accept an inheritance, it’s yours. If you know you intend to disclaim the inheritance, have an estate planning attorney create the disclaimer to protect yourself.

If the disclaimer is valid and properly prepared, you simply won’t receive the inheritance. Instead, the property will go to whomever would have received had you predeceased the decedent.  That might be many individuals, so it is important to understand to whom the property will go if you disclaim.  It might be based upon the trust or will that named you originally, a beneficiary designation on a financial asset or the intestate laws of the state where the decedent lived.

Once you disclaim an inheritance, it’s permanent and you can’t ask for it to be given to you. If you fail to execute the disclaimer after the nine-month period, the disclaimed property might then be treated as a gift, not an inheritance, which could have an impact on your tax liability.

Persons with disabilities who receive means-tested government benefits should never accept an inheritance, since they can lose eligibility for benefits.  Now, some states will consider a disclaimer a transfer for government benefits, meaning you may lose the benefits anyway.  So, the best solution is to consult with a lawyer as soon as possible how to handle such an inheritance.

A supplemental needs trusts may be a good solution so the beneficiary with a disability can receive the inheritance without loss of benefits.  You can see more on SNTs here.  https://galligan-law.com/how-do-special-needs-trusts-work/  

The high level of federal exemption for estates has led to fewer disclaimers than in the past, but in a few short years—January 1, 2026—the exemption will drop down to a much lower level, and it’s likely inheritance disclaimers will return.  So, if you want to consider a disclaimer, definitely speak to a qualified attorney who can assist you with the process.

Reference: NWI Times (Nov. 14, 2021) “Estate Planning: Disclaimers”

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