Planning for the future means planning beyond your own future. Taking a vested interest in those you leave behind, and how passing on your assets is going to occur, requires careful thought and a well-rounded understanding of your options. Two popular options of transferring assets in estate planning are pay on death (POD) and transfer on death (TOD) designations.
Most commonly found in life insurance policies, these designations can apply to many types of assets. The estate planning attorneys at Clear Counsel Law Group have worked with POD and TOD designations many times. While these are effective tools, they aren’t all upsides. The following gets into the best scenarios to use these designations and the ones where you want to avoid them.
What are POD and TOD Designations?
POD and TOD designations operate like other estate planning elements in that they allow you to name beneficiaries who will receive specific assets upon your death. These designations can be applied to bank accounts, vehicles, stock certificates, and even real estate.
However, unlike other estate planning elements, the asset attached to a POD or TOD immediately goes to the beneficiary. No court date, no waiting for probate, just a smooth transfer with proof of your passing.
Advantages of POD and TOD Designations
The primary benefit of these designations is their simplicity and cost-effectiveness. They allow for the quick and easy transfer of assets without the need for probate, which can be both time-consuming and expensive.
For example, you can apply a TOD to a beneficiary deed for your house. upon your death, ownership of the house automatically transfers to the named beneficiaries. Your heirs can claim ownership of your house simply by presenting a death certificate and an affidavit to the County Recorder.
Pitfalls of POD and TOD Designations
While POD and TOD designations can make transferring assets more straightforward, their speed and lack of overarching management creates significant risks:
Co-Ownership Issues: If multiple beneficiaries inherit an asset like a house, they must agree on its use, maintenance, and potential sale. This can lead to disputes and complications, especially if the beneficiaries have different ideas about what to do with the property.
Minors as Beneficiaries: If a beneficiary is a minor, the bank or financial institution will not transfer the assets to them directly. This could result in a court-appointed guardianship, and once the minor turns 18, they would receive the assets outright. This may not be ideal for their situation.
Government Benefits: If a beneficiary is receiving government benefits, a sudden inheritance could disqualify them from those benefits.
Overlooked Updates: People’s circumstances change, and if your designated beneficiaries change (due to death or other factors), but you fail to update your POD or TOD designations, it could lead to unintended disinheritance.
Consult with an Estate Planning Attorney
Given these potential issues, it’s wise to consult with an estate planning attorney before setting up POD or TOD designations. A good attorney will review your specific situation and advise you on the best approach. They can help you understand the implications of each option and ensure that your estate plan aligns with your wishes and circumstances.
For example, to avoid a sudden windfall of wealth plummeting onto an 18-year-old, you could establish a trust to hold that asset for them. A trust gives you fine-tuned control including oversight and slow, steady distribution of the asset.
Considerations in Estate Planning
To best determine what you want to your estate, you need to gather information and learn about your options. This is often about asking the right questions. When meeting with an estate planning attorney, consider the following:
- The age and financial maturity of your beneficiaries.
- The potential impact of inheritance on any government benefits your beneficiaries may receive.
- The likelihood of disputes among beneficiaries, especially in the case of real estate.
- The need for periodic reviews and updates to your estate plan.
At Clear Counsel Law Group, we offer free consultations to help you vocalize your estate planning needs. Whether it’s deciding on POD or TOD designations, setting up a trust, or simply drafting a will, our experts are here to provide you with tailored advice. We understand that every situation is unique, and we are committed to helping you make the best choices for your and your family’s future.