Question: Is it better to have my savings and investments go directly to my beneficiaries when I die, or should I have them go to my estate?
Loraine’s Answer: Initially, it may seem like a good idea to name direct beneficiaries on financial accounts like checking, savings, and retirement funds instead of passing them through a Will, which must be probated. However, there are good reasons for considering having your accounts pass to your estate instead. If there is truly a strong reason to avoid probate, then using a Revocable Living Trust (also sometimes known simply as a living trust), may be a better option than using Payable on Death (POD) or Transfer on Death (TOD) designations.
- If all your accounts pass by POD or TOD, there may not be enough money in your estate for your family to cover your legal obligations, such as taxes or debts, or to let them pay expenses such as your funeral or the costs of dealing with your home and other non-financial assets. This can make dealing with your affairs after your death extremely difficult.
- Even though assets that pass by POD or TOD are not accessible to your Executor or Trustee and cannot easily be used to pay necessary expenses after your death, if your estate is not able to pay your debts and expenses, your creditors can come after the assets that passed by POD or TOD in the hands of your beneficiaries, so the beneficiaries are not protected.
- Passing money to a beneficiary through POD or TOD means it will pass to that beneficiary outright, which can expose the funds to claims from outsiders if the beneficiary gets sued, goes through a divorce, or has a business failure.
- Leaving money to a child with special needs using POD or TOD may jeopardize the child’s ability to receive important government benefits such as Medicaid or Supplemental Security Income (SSI).
- If you leave assets to one child using POD or TOD and assets to another child through your Will, you may be creating disparities between the children in terms of what they actually receive, since one child’s share will not be available to pay expenses and taxes, and the other child’s share will need to be used to pay those items before the child can keep the rest. Unequal treatment can lead to family disputes. Further, family disputes may arise.
People often use POD and TOD designations to try to avoid the need for a probate process before their assets can be distributed to their beneficiaries. However, living trusts can be used to reduce or avoid the need for a probate proceeding while avoiding many of the pitfalls that come with using POD and TOD designations. Revocable living trusts also offer many other potential benefits for you and your intended beneficiaries.
Key Estate Planning Takeaway: There are many details to think about when deciding how best to pass your financial assets to your beneficiaries. These should be discussed with an experienced estate planning attorney, who can help you determine whether POD and TOD designations are a good option or whether you will be better off using options such as living trusts.
This “Q&A with Loraine” blog series features answers from Morgan + DiSalvo Partner Loraine DiSalvo to common questions. A key takeaway from each exchange highlights an important facet of estate planning.