Introduction: Thinking About Probate Avoidance

• Is It Worth Your While to Avoid Probate?
• What Probate Avoidance Can’t Change
• Comparing Probate Avoidance Methods
• A Lick of Common Sense

1. Set Up Payable-on-Death Accounts

• The Paperwork
• Adding a POD Designation to a Joint Account
• Choosing Beneficiaries
• If a Beneficiary Dies Before You Do
• If You Change Your Mind
• Claiming the Money

2. Name a Beneficiary for Your Retirement Accounts

• Choosing a Beneficiary
• Required Minimum Distributions From Retirement Accounts

3. Name a Beneficiary for Your Stocks and Bonds

• Transfer-on-Death Registration
• Registration of Government Bonds and Notes

4. Name a Beneficiary for Your Vehicles

• Transfer-on-Death Registration
• Joint Ownership With the Right of Survivorship
• Special Transfer Procedures for Vehicles

5. Name a Beneficiary for Your Real Estate

• Can You Use a TOD Deed?
• How It Works: An Overview
• Possible Drawbacks of TOD Deeds
• How to Prepare, Sign, and Record the Deed
• Three Ways to Cancel the Deed—And One Strategy to Avoid
• How the New Owner Claims the Property

6. Hold Property in Joint Ownership

• Types of Joint Ownership That Avoid Probate
• Joint Tenancy
• Tenancy by the Entirety
• Community Property
• Alternatives to Joint Ownership

7. Create a Living Trust

• How a Living Trust Avoids Probate
• Other Advantages of a Living Trust
• Why You Still Need a Will
• Do You Really Need a Living Trust?
• Creating a Valid Living Trust
• What Property to Put In a Trust
• Taxes and Record Keeping
• Amending or Revoking a Living Trust Document

8. Take Advantage of Special Procedures for Small Estates

• Why Even Large Estates May Qualify
• Claiming Wages With an Affidavit
• Claiming Other Assets With Affidavits
• Simplified Court Procedures

9. Make Gifts

• The Federal Gift Tax
• Making Tax-Free Gifts
• Gifts That Could Land You in Tax Trouble
• What to Give
• Gifts to Children
• Thinking Before You Give

10. Putting It All Together

• Alice and Frank: A Simple Life
• Maria: Dealing With Widowhood
• Mike: Midlife Concerns
• Jim and Terry: An Unmarried Couple
• Esther and Mark: New Love, Old Money
• Linda and Tomas: Comfortable

Glossary

Appendix

• State Information

Index

Chapter 1
Set Up Payable-on-Death Accounts

Payable-on-death bank accounts offer one of the easiest ways to keep large and small sums of money out of probate. All you need to do is fill out a form provided by your bank naming someone to inherit the money in an account or a certificate of deposit. The bank and the named beneficiary will do the rest, bypassing probate court entirely. It’s that simple.

While you’re alive, the person you named to inherit the money in a payable-on-death (POD) account has no rights to the balance. If you need the money or change your mind about leaving it to the beneficiary you named, it’s still yours. You can spend it, choose a different beneficiary, or close the account.

The Paperwork

Banks, savings and loans, and credit unions offer payable-on- death accounts at no cost. You won’t be charged extra fees for this service. You can add a payable-on-death designation to any new or existing account, including checking, savings, and certificate of deposit accounts.

Setting up a payable-on-death bank account is simple. When you open the account and fill out the bank’s forms, list the beneficiary on the signature card (or follow the online procedures, if available). The beneficiary of a payable-on-death account, commonly called a “POD payee,” doesn’t have to sign anything.

The bank might also ask for additional information, such as the beneficiary’s address and birth date. For example, a few states require the current address of each beneficiary.

Example: Magda wants to leave her two nieces some money. She opens a savings account at a local bank, deposits $10,000 in it, and names her nieces as payable-on-death beneficiaries. After Magda’s death 10 years later, they claim the money in the account—including the interest paid by the bank over the years. No probate court involvement is necessary.

If you choose an account that has restrictions on withdrawals— for example, a 24-month certificate of deposit—the bank will probably waive the early withdrawal penalty if you die before the period ends.

You might have considered changing a solely owned bank account to a joint account with someone you want to inherit the money after your death. But you might be better off by naming the person as the POD beneficiary for several reasons.

If you added another person’s name to yours on the account, that person would immediately have the right to withdraw money from the account. A creditor could also come after the added person’s account share. (See Chapter 6.) A POD account avoids those potential problems.

Example: Matthew, an elderly widower, makes his daughter, Lily, the payable-on-death beneficiary of his checking account. Lily (and her creditors) will have no access to the money during Matthew’s life. However, she can withdraw the account funds quickly and easily after his death.

CAUTION
Don’t create a joint account just to avoid probate. If you want to leave money to someone at your death, stick to a POD account. It will accomplish your goal simply and easily. Don’t set up a joint account with the understanding that the other person will withdraw money only after you die. This common mistake often creates confusion and family fights.

Adding a POD Designation to a Joint Account

POD accounts can be useful for couples with joint bank accounts.

Accounts With a Right of Survivorship

Most joint accounts come with the “right of survivorship.” When one co-owner dies, the other will automatically become the sole owner of the account. So when the first owner dies, the funds in the account belong to the survivor—without probate.

Adding a POD designation to a joint account takes effect only when the second owner dies. Then, whatever is in the account goes to the POD beneficiary you named.

Example: Virginia and Percy have a joint checking account with a balance of several thousand dollars. They hold this account as joint tenants with right of survivorship. They decide to name their sons, both adults, as POD beneficiaries. After both Virginia and Percy have died, the bank will release the funds in the account to the sons in equal shares.

Both spouses (or other co-owners) should realize that designating a POD beneficiary for a joint account doesn’t restrict the surviving spouse’s freedom. The survivor can change the beneficiary or close the account, shutting out the beneficiary named back when both spouses were still alive.

Example: Howard and Lin name Megan, Howard’s daughter from a previous marriage, as the POD payee of their joint savings account. Howard dies first, and relations between Lin and Megan deteriorate in the years that follow. Lin decides to remove Megan as POD beneficiary and instead name her nephew, Max. When Lin dies, Megan doesn’t inherit any money in the account even though she’s firmly convinced that her father intended her to.

Adding a POD beneficiary to a joint account avoids probate and allows you to plan for the unlikely event that both persons die simultaneously.

Example: Deanna and Oliver have a joint savings account. They name their daughter, Jessica, as the payable-on-death beneficiary. When Deanna and Oliver are killed in an accident, Jessica inherits the money in the account without probate.

Accounts With No Right of Survivorship

Some kinds of joint accounts can’t be turned into payable-on-death accounts. Unless your joint account provides that when one owner dies, the other automatically becomes the sole owner, don’t try to name a POD payee for the account.

Two situations where this applies are:

• State law requires you to request the right of survivorship in writing when you open the account, and you didn’t make the proper request. In that case, the account is not a joint tenancy account. It’s what’s known as a “tenancy in common” account, which means you can leave your share to anyone you choose (not just the surviving co-owner).
• You and your spouse live in a community property state and own a community property account together. Such accounts don’t carry the right of survivorship. Each spouse has the right to leave half of the money to someone else.

CAUTION
Don’t use a POD designation for a joint account that doesn’t have the right of survivorship. In other words, don’t try to arrange things so that a POD payee inherits just your share of a co-owned bank account at your death. It’s far more reliable and less confusing to establish a separate account and name a POD payee.

Choosing Beneficiaries

When naming POD beneficiaries, you’ll want to consider several issues.

Children

Naming a minor child younger than 18 as a POD payee is fine. However, if the account is worth more than a few thousand dollars, consider what might happen if the beneficiary is still a child at your death. You will probably want to arrange for an adult to manage the money for the child.

If you don’t, and a minor child inherits money from a payable- on-death account, one of three things will happen:

• If state law allows it, the money, no matter how much, can be given to the beneficiary’s parents (or to the beneficiary, if married). The parents hold the money for the benefit of the child.
• If the amount is relatively small—generally, a few thousand dollars, depending on state law and bank custom—the bank will probably turn it over to the child or the child’s parents.
• If the amount is larger, the parents will probably have to ask the court to appoint them as guardians of the money. (If the parents aren’t alive, a guardian supervised by the court will already be in place.)

If you wish, you can choose someone now to manage the money without court supervision in case the child is still younger than 18 at your death. The logical choice, usually, is one of the child’s parents.

In most states, the easiest way to do this is to name an adult to serve as “custodian” of the money. Custodians are authorized under the Uniform Transfers to Minors Act (UTMA), which every state has adopted.

All you need to do is name the custodian as the POD payee of the account and make it clear that the custodian is to act on the child’s behalf. That gives the custodian the legal responsibility to manage and use the money for the child’s benefit. Then, when the child reaches adulthood, the custodian turns over what’s left to the beneficiary. Most, but not all, UTMA states set 21 as the age when the custodianship ends. The ages are listed below.

Example: Alma wants to make her nine-year-old grandson, Tyler, the POD payee of a bank account. She decides to name Tyler’s mother, Gabrielle, as custodian of the money in the account. On the bank’s form, Alma puts, in the space for the POD payee, “Gabrielle Lopez, as custodian for Tyler Irving under the Florida Uniform Transfers to Minors Act.” If Tyler is not yet 21 when his grandmother dies, Gabrielle will be legally in charge of the money until Tyler’s 21st birthday.

Multiple Beneficiaries

If you want to name more than one person to inherit the money in a bank account, for example, your three children or two nephews, it’s no problem. You’d list all of the beneficiaries on the bank’s form. Unless you specify otherwise, each will inherit an equal share of the money in the account.

CAUTION
Be careful when setting up unequal shares. In a few states—Florida and Oklahoma, for example—you cannot change the equal-shares rule. If you’re concerned about this issue, check your state’s law or open a separate account for each beneficiary.

It’s important to realize that you can’t name an alternate payee or someone to inherit the money if your first choice doesn’t outlive you. Whoever you name on the bank’s form will inherit the money at your death.

For example, some bank forms provide three spaces for beneficiaries’ names. If you list three people on the form, they will split the money in the account.

It’s not uncommon for people to assume that Beneficiary #1 will get all the money, and that if he isn’t alive at your death, then #2 will inherit it, and so on. But that’s not the way it works. The bank won’t consider your preferred ranking order.

If one of the beneficiaries dies before you, all the money will go to the surviving beneficiaries in most circumstances. So if you leave an account to your three children, and one of them dies before you do, the other two will inherit the funds. Depending on your family situation, this result might be unacceptable. If it’s not what you want, you should name new POD payees after a beneficiary dies.

However, in some states, if you name multiple beneficiaries, and one of them dies before you do, the deceased beneficiary’s share will go to the estate. Check with your bank to see what rule applies to you.

Also, give some thought to the kind of asset you’re leaving. Naming more than one POD beneficiary to inherit a bank account isn’t generally a problem because the money can be divided.

However, adding a POD designation to a brokerage account can be more complicated. If the account owns one large asset—for example, a bond—it will need to be sold and the proceeds divided among all the beneficiaries. Although doable, the sale proceeds might need to be reported to one Social Security number, which the beneficiaries might not want. These problems can be time-consuming and costly, outweighing any probate avoidance benefit.

Institutions or Businesses

It’s unlikely, but your state’s law might restrict your ability to name a business or an institution, such as a school, church, or another charity, as the beneficiary of a POD account. Delaware law, for example, requires the beneficiary to be “a natural person” or a nonprofit organization. (5 Del. Code Ann. § 924.)

Your Spouse’s Rights

You might not have complete freedom to dispose of the funds in a bank account as you wish—even if it’s in your name. Your spouse or partner (if you’ve entered into a registered domestic partnership or civil union) could have rights, too. It will depend on your state’s law.

Spouses’ Rights in Community Property States

If you live in a community property state, your spouse (or registered domestic partner) probably already owns half of whatever you have in a bank account, even if the account is in your name only. If you contributed money you earned while married, that money and the interest earned is “community property,” and your spouse is legally entitled to half.

There are a few exceptions to this rule. Your money is yours to do with as you please if:

• you and your spouse signed a valid agreement to keep property separate, or
• the money is your separate property because you deposited it before you married, inherited it, or received it as a gift, and you haven’t mixed it with community property in the account.

If the money in an account that is in your name only is com- munity property, and you want to name someone other than your spouse as the POD beneficiary for the account, it’s a good idea to get your spouse’s written consent. Otherwise, your spouse could assert a claim to half of the money in the account at your death, leaving the beneficiary you named with only half.

CAUTION
You can’t shortchange creditors or family. If you don’t leaveenough other assets to pay your debts and taxes or to support your spouse and minor children temporarily, a POD bank account could be subject to the claims of creditors or family after your death. If there is a probate proceeding, your executor can demand that a POD beneficiary turn over some or all of the funds to pay creditors. If you specifically pledged the account as collateral for a debt, the creditor is entitled to (and doubtless will) claim repayment directly from the funds in the account. The POD payee gets whatever, if anything, is left.

Spouses’ Rights in Noncommunity Property States

If you leave money in a POD bank account to someone other than your spouse, you’ll want to be sure your spouse doesn’t object to your overall estate plan.

In almost all noncommunity property states (all states except the ones listed above), a surviving spouse has the right to claim a certain percentage of the deceased spouse’s property—the spouse’s “elective share” or “statutory share.” In many states, it amounts to about a third of what the spouse owned. However, it’s rare for a spouse to go to court over this because most spouses inherit more than their statutory share.

Depending on state law, the funds in a POD account might be subject to a spouse’s claim. Some states consider such accounts outside the surviving spouse’s reach.

If a Beneficiary Dies Before You Do

If someone you have named as a POD beneficiary dies before you do, you should fill out the necessary paperwork at the bank to put a new beneficiary in place.

If you named more than one payee, and one or more of them dies before you do, the funds in the account will likely go to the survivor(s) at your death. (See “Choosing Beneficiaries,” above.)

If none of the POD payees you named is alive at your death, the money in the account will become part of your estate. The bank will release the funds to your executor, who will be responsible for seeing that they are distributed under the terms of your will or state law.

The money will probably have to go through probate unless your estate is small enough to qualify for special, simpler procedures. (Chapter 8 discusses these probate shortcuts.)

TIP
If you want to name alternate beneficiaries, don’t rely on a POD account. Banks generally don’t allow you to name an alternate POD payee—that is, someone who would inherit the money if none of your primary beneficiaries outlived you.

If you make a will (and you should, for reasons like this), it will function as a backup, as explained below. But that doesn’t avoid probate. If you want to name a backup beneficiary and avoid probate, you can use a living trust. (See Chapter 7.)

Depending on state law, however, the bank might be able to release the money directly to your legal heirs—the close relatives who are entitled to inherit from you if you don’t leave a will. In that case, the money won’t have to go through probate.

If the money goes to your executor, it will be distributed under the terms of your will, even if you didn’t mention this account in your will. Most wills contain a “residuary clause,” which names a beneficiary to inherit assets not specifically mentioned in the will. The person you named to inherit “residuary” property would receive this money.

Example: Andres names his brother as the POD beneficiary of his savings account. But his brother dies, and Andres, who is ill, isn’t able to change the paperwork at the bank to name a new payee. Andres does, however, have a will containing a residuary clause, naming his daughter Madeline as the residuary beneficiary. When Andres dies and the will is probated, the money in the account goes to her, along with everything else that Andres didn’t specifically leave to another beneficiary.

If You Change Your Mind

Families change; relationships change. At some point, you could decide you don’t want to leave money to a POD payee you’ve named, or a beneficiary might die before you pass. You can change the POD arrangement, but you must meticulously follow the procedures. The law books, sadly, are full of cases brought by relatives fighting over the bank accounts of deceased loved ones who didn’t pay enough attention to these simple rules.

How to Change a POD Designation

There are two reliable ways to make a change to a POD account:

• Withdraw the money in the account.
• Go to the bank—or the bank’s website if you named your POD beneficiary online—and use the bank’s form to change the beneficiary. Fill out, sign, and deliver a new account registration card or online form to the bank that names a different beneficiary or removes the POD designation altogether.

To ensure the bank follows your wishes after your death, dot the i’s and cross the t’s when following the bank’s procedures. The change won’t be effective unless you fulfill the bank’s requirements, whatever they are. Almost all banks require something in writing— a phone call isn’t good enough. To be effective, in most places, the bank must receive your written instructions before your death.

That doesn’t sound difficult, but it’s not all that unusual to find problems. In one case, after a woman’s death, a new signature card, in a stamped envelope, was found on her desk. Relatives sued over the money. The court ruled that the change was ineffective because the new signature card was ambiguous, and the bank had not received it before her death. (Codispoti v. Mid-America Federal Savings and Loan Ass’n, No. 85AP-451, Ohio App. (1986).)

Contradictory Will Provisions

Trying to change a POD designation by leaving the account to someone else in your will is almost sure to cause problems after your death. At best, it will spawn confusion; at worst, disagreements or even a lawsuit.

About half the states say, flat out, that a POD designation cannot be overridden or changed in a will. In these states, a will provision that purports to name a new beneficiary for a POD account will have no effect.

Example: Kimberly fills out her bank’s form and names her niece, Harper, as the POD beneficiary of her bank account. After a disagreement, Kimberly writes her will, leaving the account funds to her friend Jamillah. At Kimberly’s death, Harper is still legally entitled to collect the money.

Some other states do allow you to revoke a payable-on-death designation in your will if you specifically identify the account and the beneficiary. An attempt to wipe out several accounts with a general statement won’t work. For example, a South Dakota woman wrote in her will, “I hereby intentionally revoke any joint tenancies or trust arrangements commonly called ‘Totten trusts’ [another name for POD accounts] by this will.” After her death, a court ruled that even this language wasn’t specific enough; state law requires every POD account to be individually changed or revoked. (In re Estate of Sneed, 521 N.W.2d 675 (S. Dak. 1994).)

The moral: Never rely on your will to change a payable-on-death account. Instead, deal directly with the bank that will be in charge of the money after your death.

Property Settlement Agreements at Divorce

A property settlement agreement, even though it’s approved by a court when a couple divorces, might not revoke a payable-on-death designation.

For example, when a New York couple divorced, the property settlement agreement gave the husband “any and all bank accounts, held jointly or otherwise.” Some of those accounts named the wife as a payable-on-death beneficiary; when the husband died, the former wife inherited the money. The court ruled that because the settlement agreement had not named the accounts specifically, it had not met New York’s statutory requirements for the revocation of a Totten trust account. (Eredics v. Chase Manhattan Bank, N.A., 760 N.Y.S.2d 737 (Ct. App. 2003).)

Similarly, when an Arizona couple divorced, their property settlement agreement gave the husband some bank certificates of deposit, for which he had named his wife as the payable-on-death payee. But the husband never went to the bank and removed the wife as the POD payee. When he died, a court ruled that the ex-wife was entitled to the money because the settlement agreement had no effect on the contract between her former husband and the bank. ( Jordan v. Burgbacher, 883 P.2d 458 (Ariz. Ct. App. 1994).)

Claiming the Money

After your death, all a POD beneficiary needs to do to claim the money is show the bank a certified copy of the death certificate and proof of identity. If the account was a joint account, the bank will need to see the death certificates of all the original owners. The bank records will show that the beneficiary is entitled to whatever money is in the account.

State laws authorize banks to release money in payable-on-death accounts when proof of the account holder’s death is shown. They don’t need probate court approval. Legally, the money automatically belongs to the beneficiaries when the original account owner dies. It’s not part of the probate estate and isn’t under the executor’s control.

Beneficiaries can, however, encounter some delays when they go to claim the money:

• Tax clearances. Like other bank accounts, a payable-on-death account might be temporarily frozen at your death if your state levies estate taxes. The bank will release the money to your beneficiaries when the state is satisfied that your estate has ample funds to pay the taxes.
• Waiting periods. There could be a short waiting period before the money can be claimed. Vermont, for example, doesn’t allow a bank to release funds to POD beneficiaries until 90 days after the account owner’s death. (8 Vt. Stat. Ann § 14205.)

When you set up a POD account, ask the bank what the POD payee will need to do to claim the money after your death. Then, make sure the payee knows what to expect.

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