“Payable on Death” (POD) and “Transfer on Death” (TOD) designations are sometimes used — most typically on bank accounts and investment accounts — in order to pass assets directly and automatically to beneficiaries upon the death of the account owner, free of the probate process.  However, making POD/TOD designations without carefully considering how those designations coordinate with the account owner’s Will (or Trust) can result in unintended, unwanted — and sometimes disastrous — consequences.

     A person’s Will (or Trust) ideally contains a carefully considered plan for distributing his or her assets, and often includes provisions for disposition of property if a beneficiary is predeceased or underage or incapacitated.  But these provisions come into play only for assets that pass to the person’s Estate (or Trust).  Property governed by beneficiary designations passes automatically by the terms of the designations, outside — and regardless of — the terms of the Will (or Trust).*  (The exception to this is when the Estate or Trust is the actual named beneficiary.)  So, although POD/TOD designations can offer the benefit of probate avoidance, they can also upend or complicate intended estate plans in a variety of ways.

• Inadvertent disinheritance/”over-inheritance” of beneficiaries

      Intended beneficiaries can be inadvertently “disinherited” or “overly-inherited” by PODs/TODs in different ways, including the following:
 
     (1) A POD/TOD may designate your children as the beneficiary at your death.  But if one of your children predeceases you, grandchildren may be disinherited if the language of the POD/TOD agreement causes your deceased child’s share to go to your other, surviving children (who may “over-inherit”) rather than to the children of your deceased child.
 
     (2) Inadvertent disinheritance (or “over-inheritance”) can also occur when a POD/TOD is used as a “Will substitute” to pass a certain asset to a particular beneficiary.  For example:  you have a bank account holding $10,000 and you want to leave $10,000 to your niece, so you simply name her as beneficiary of the account rather than going through the formality of naming her in your Will.  The potential problems with that approach are that you may not even own that account upon your death, or the value of the account may have radically changed — either more or less – in the meanwhile.  Indeed, there are many different circumstances that can cause the intended gift to fail in whole or in part or, alternatively, that lead to over-gifting.
 
     (3) PODs/TODs may cover so much of your total assets that there may be nothing left in your Estate (or Trust) to fulfill bequests contained in your Will (or Trust).   For example, you may have dollar-amount bequests listed in your Will to your favorite charities (or to certain individuals) that cannot be fulfilled because your POD/TOD designations have diverted too much of your assets away from your probate estate, leaving insufficient funds to satisfy the bequests you intended.  It does not matter how clearly you stated your intent in your Will to have assets go to those charities/individuals; if the assets are not available because they already passed to other beneficiaries, these gifts will legally lapse.

• Direct distributions to minors and incompetents

     Wills and Trusts are often drafted in a way that avoids direct distributions to minors and incompetents, in order to avoid a need for costly guardianship proceedings.  When assets pass directly to minors or incompetents under PODs/TODs, this drafting protection is lost.  If the assets pass instead through the Estate (or Trust), then any protective language in the estate planning documents is available.
 
     Sometimes PODs/TODs are used to leave property to a trusted adult, with the idea that such adult will use the assets for the support of a minor or incompetent.  This is a dangerous approach in that there are many ways it can go wrong — including some beyond the trusted adult’s control.

• Estate (or Trust) liquidity problems

      When assets flow to the Estate (or Trust), they are generally readily available for payment of the deceased’s debts and expenses.  If PODs/TODs cover so much of your total assets that there is not enough left to pay debts and expenses, this can create a headache for your Executor (or Trustee), who may have to chase down POD/TOD beneficiaries for contribution.  Making things as easy as possible for one’s successors is often a goal in estate planning, and the creation of liquidity problems thwarts that goal.
 
     Estate planning is a combination of legally operative documents, asset titling, and beneficiary designations.  It is important that these different parts work in concert with each other, rather than at cross-purposes.  PODs and TODs may be useful in some situations, but careful attention must be paid to avoid unintended and unwanted results.  If you have -- or are considering -- POD or TOD designations, we recommend that you consult with your estate planning professional to make sure you are not potentially creating situations contrary to your wishes, and that you review the designations regularly. *This is also true for property held jointly with a right of survivorship — such property passes automatically to the survivor(s) by virtue of the survivorship agreement rather than by the terms of the Will or Trust.
 

 

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