Posts Tagged ‘POD’

How To Avoid Probate — And What Doesn’t

APRIL 23, 2012 VOLUME 19 NUMBER 16
Let us try to demystify probate avoidance for a moment. Note that for the purposes of this description, we are not going to argue with you about whether avoidance of probate is good, bad, desirable or a foolish goal — we start here with the assumption that probate avoidance is important. Another day, perhaps, we will discuss with you whether you ought to be concerned about probate avoidance.

Definition of terms first: probate is the court process by which your estate is settled and distributed to your heirs (if you have not made a valid will) or your devisees (if you have). Confusingly, “probate” is also the term applied (in most states) to the court where probate proceedings, guardianship, conservatorship and sometimes even civil commitment and adult adoptions are conducted. We are not talking here about how to avoid probate court altogether, but just about how to keep your estate from having to go through the probate process upon your death.

Arranged (more or less) from least desirable to most, here are some of the ways to avoid probate of your estate upon your death:

Die poor. In Arizona, an estate consisting of up to $50,000 of personal property can be collected by the people who claim to be entitled to it without the need of a probate court proceeding. The affidavit for collection of personal property is widely available and usually free. Your survivors can use it to transfer title to your auto, or to collect small bank (or other financial) accounts. The statute providing for collection of small estates also provides a mechanism for the surviving spouse to get a decedent’s last paycheck, and for beneficiaries to transfer title to real property up to another $75,000 in value. Most other states have a similar law, but with dollar limits that vary widely.

Give it all away. One sure-fire way to avoid probate: give everything to your kids (or whomever you want to receive your stuff) now. The main problem with this approach should be obvious — what if they won’t let you live in your house any more, or withhold the interest you counted on them returning to you each month? Things change: you might change your mind about leaving everything to that child, or to all your children. The child you transfer assets to might marry someone you don’t trust. Worse yet, that child might die — leaving you at the mercy of his or her spouse and children. Maybe you and the child you give your stuff to will end up disagreeing about when you need to go to a nursing home, or whether you ought to get married late in life, or even take in a roommate.

As an aside, it amazes us how often clients come to us after having given everything to their children. Things so often do not work out as planned. This is a very poor way to handle your estate planning — but it would avoid probate. We hear that those new-fangled strap-on jet packs avoid traffic jams, too — but we don’t recommend them as a means of getting to the doctors office.

Joint tenancy. People often refer to this method of holding title by its formal name: “joint tenancy with right of survivorship.” That makes the value of the title pretty clear — the surviving joint tenant(s) own the deceased joint tenant’s portion of the property upon death of one joint tenant. You can have more than two joint tenants — upon the death of any one, the survivors’ interests all increase. We liken this arrangement to a tontine — a lovely idea that combines the best elements of estate planning and lotteries.

Lawyers generally discourage the use of joint tenancy in estate planning. The problems are less obvious than simply giving away your stuff, but they are still real. You might later decide that the child you established the joint tenancy with should get a larger or smaller share of your estate — but the joint tenancy is always, by definition, an equal ownership interest with all the other joint tenants. People who favor joint tenancy as an alternative to good estate planning invariably, in our experience, seem to think it would be OK to name just one child as joint tenant, and to trust her (or him) to divide the property among siblings. That often works just fine — but it often leads to family disputes when the children have different expectations or understandings.

Other problems with joint tenancy: you subject your property to the creditors, spouses and business partners of the child you put on your title. You lose the power to refinance your home, to cash out your certificate of deposit, or to liquidate your government bonds — more accurately, you lose the power to do those things unless your joint tenant will also go to the title company or the bank with you and sign willingly.

Lawyers tend to dislike joint tenancy, except in one circumstance. Many people own their property in joint tenancy with spouses (homes are especially likely to be titled in that fashion), and we lawyers generally think that is alright. In Arizona, there is another alternative between spouses that we like a little better: community property with right of survivorship. That conveys some income tax benefits to a surviving spouse while still avoiding the necessity of any probate on the first spouse’s death.

Beneficiary designations. You probably have a beneficiary (maybe multiple beneficiaries) named on your life insurance policy, on any annuities you have been talked into buying, and on your retirement account (if there is any death benefit included). Did you know that you can do the same thing with bank accounts, stocks and bonds, and even (in Arizona and a handful of other states) real estate?

  • POD (payable on death) bank accounts — you can designate a POD beneficiary (some banks use the acronym ITF — “in trust for” — and it means the exact same thing) who has no current interest in your account but receives it automatically upon your death. You can even name multiple POD beneficiaries. And you can do this at banks, credit unions, savings and loans. Caution: if you go to your bank and say “I heard that there’s a way I can put my son’s name on my bank account” the clerk will almost always hand you a joint tenancy signature card. Make clear that you’re talking about POD designations — they are used less commonly but are a better fit for most people.
  • TOD (transfer on death) for stocks and bonds — there is a designation similar to the bank POD account for stocks, bonds, brokerage accounts and mutual funds. It is usually referred to by its acronym, TOD. It is actually more flexible than the POD designation available to banks — it allows you to designate what happens if a TOD beneficiary should die before you, for instance. Talk to your stockbroker about this titling arrangement if you think it might be a good idea for you — but talk to your lawyer first.
  • Beneficiary deeds for real estate — this one is available in only about a dozen states, but Arizona is one of those. It is like a POD or TOD designation for real estate — including your home. It only works on real estate located in Arizona or one of the other beneficiary deed states. The beneficiary deed conveys no current interest in your property, but avoids probate and vests directly in your beneficiary upon recording of your death certificate. You and your spouse can, for example, own your home as community property with rights of survivorship but upon the second death automatically transfer to your children in equal shares (with provisions about what happens if one of them should not survive both of you) upon the second death. We have written about beneficiary deeds in Arizona before, and our earlier explanations are still valid (even though our newsletter style has been updated).

What’s wrong with these beneficiary-based devices? Two things, at least: (1) they don’t provide for what happens if you make life changes that effectively adjust your estate plan (if, for instance, you live off of one account that was to go to one or two children, and thereby reduce their share of the estate) and (2) they make it hard to change your estate plan (if you decide to disinherit a child, for instance, you have to make sure to change all of the operative documents and titles). But in the right circumstance, beneficiary designations can effectively transfer your estate without probate — they act as a sort of a “poor man’s” trust.

Trusts. Which gets us to the most efficient way to avoid probate for most people — the living trust. To be clear, the trust doesn’t really avoid probate at all — but your trust assets do not have to go through the probate process and so anything you have transferred during life to the trust will avoid probate. It is the “funding” of the trust that avoids probate, not the trust itself.

So there you have it. Probate avoidance in a nutshell. But wait — what’s not on that list? Did you notice? There is so much confusion about the missing item, which does not avoid probate:

Making a will. Preparing and signing your will is a good thing to do. It avoids intestate succession, which might not be right for you. It designates who will be appointed by the court to act as your personal representative. It can name the person who will be your children’s (or your incapacitated spouse’s) guardian. It can even create a trust. But it does not avoid probate.

Your will is instead instructions to the probate court. It has no effect unless and until it is admitted to probate, which another way of saying that a court has determined that it really is your last will. Clients frequently say: “thank goodness I’ve signed my will today. Now I can sleep better knowing my children won’t have to go through probate.” We say: “sit down. We have some more talking to do. Obviously we have failed to get you to understand the distinction between wills and probate avoidance.” Then we talk about living trusts.

Did that help? Do you have a better idea for probate avoidance (we’ve left a couple of less common methods off)? We’d love to hear from you.

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To Our Favorite Estate Planning Client: Please Help Us Help You

JUNE 1, 2009  VOLUME 16, NUMBER 42

Dear client:

It has been wonderful working with you. We are pleased that your estate plan is completed, and simultaneously saddened that we will not be seeing much of you for a couple years. Please remember to get in touch with us if there are major life changes. In any event, you should probably make an appointment in five or six years just to check on what is new — either in your life or in the  world of estate planning.

In the meantime, we would very much like it if you would help us out. It will make things much easier for us (and for your family) if you will take these additional steps:

Please talk with your family. The best way to minimize disappointment and disputes after your death is to let everyone know what to expect in advance. Be prepared to discuss issues with your family, too. You may even make changes to your estate plan based on those conversations — we will be happy to have follow-up discussions as needed. There is no legal requirement that you either share or withhold copies, but there are good practical reasons to let them in on the plans.

Recently we had a client who carefully prepared her advance medical directives. She told the son she named as her agent what she wanted, and she completed all the documents correctly. When she fell ill, her daughter (who had not maintained much contact) could not believe her mother would want to refuse medical care. She initiated legal proceedings to force continued aggressive treatment. She was not successful, but the cost and heartache were both considerable — and brother and sister no longer speak to one another. Mom could have avoided that outcome, we think, if she had discussed her wishes with both children.

Coordinate your beneficiary designations. If your will leaves everything to your children equally, but your life insurance names only your oldest daughter as beneficiary, your daughter gets the proceeds regardless of your will. Is that what you intend? If so, make it clear. If not, change the beneficiary designation to match your will. Different considerations are involved with life insurance, IRAs, and other kinds of policies; please ask us for assistance in getting your beneficiary designations arranged.

In a recent case in our office, a mother told her three children that they and her long-time companion were named as equal beneficiaries on her IRA account. When she died it turned out that the companion was the only beneficiary. Did mom intend that result, or was it an oversight? An excellent relationship with the grieving companion is endangered by this outcome. If, in fact, mom wanted to split the account among the four people most important in her life, that will not be the result.

In our recent example, even if all four beneficiaries were to agree that the account should have been split, it is not as easy as just doing that. Income tax consequences mean that the children would receive considerably less than their mother apparently intended. Even if everything can be worked out harmoniously, there will be legal expenses, not to mention a period of uncertainty and unease.Please talk with your family, and even show them the documentation. Don’t leave them uncertain about whether you really intended the result your documents indicate.

Don’t tinker with your beneficiary designations, documents or titles. If someone at your bank says you should make all your accounts into “Payable on Death” (POD) accounts, please talk to us first. If we have helped you name a trust as beneficiary on your IRA and your accountant tells you that’s a mistake, please talk to us before you change it back.

Please do not put your children’s name on your house, or your bank account, “just in case.” We prepared your documents to take care of “just in case,” and your changes may undo the value and effect of the documents we prepared for you. We are happy to discuss the effect of the change in title; if your banker tells you that we “just don’t know how banks work,” remind him that he is not the expert on how the law works. There is nothing that prevents us from meeting with you, your insurance agent and/or your broker all at once; we can then discuss and reach agreement on what should happen to effect your wishes.

Prepare a personal property list. Almost every will we prepare includes a provision that allows you to designate individual items of personal property (like family heirlooms, antique furniture, favorite paintings, etc.) that should be left to specific individuals. We encourage you to complete that list, even if it remains a work in progress. It need not list every item in your house, but time and again we have seen the outright joy on the faces of friends and family members (and particularly, we might note, on the faces of grandchildren) who received an individual item from such a list. It can convey a special message to your loved ones.

Some years ago we handled the estate of a woman whose personal property list ran to more than fifty pages. She felt strongly about each item on the list; you probably do not have that many specific bequests you wish to make. If your list is only three items long, that is fine. And once again, we urge you to show it to your family; your son may surprise you by telling you that he doesn’t actually have any interest in grandma’s antique cedar chest, and you should know that now so that you can leave it to your granddaughter instead.

Prepare a list of assets and directions. It really helps if you have left a roadmap for the person who handles your estate. You know perfectly well where the life insurance policy you bought in 1955 is located, and how often the statement from that little bank in Ohio arrives. Your daughter does not, and if she is handling your estate she will spend countless hours looking for those kinds of information. You can make her job much easier if you give her some clues and direction. She also will need to make decisions about your funeral, your obituary and even what (if any) music will be played. If you have told her what you want, her job will be so much less stressful, and the other family members can hardly criticize her for following your directions.

When you signed your estate planning documents, we gave you a form called “What My Family Should Know.” It is not the only way to gather this information, but it can be a useful starting point. If you can not locate the form, do not hesitate to contact us for a new copy; even if you have partly completed it and just want to start over or make a few changes, we will be happy to give you another blank copy. Just ask.

Incidentally, we would really like it if your online login and password information was available somewhere. Whoever handles your estate (whether after your death or after you have become incapacitated) will be able to check (and close) your e-mail account, get up-to-date information from your online bank and brokerage services, and complete many steps that take much longer if they must be done solely by mail. There is a balance to be struck, of course; you need to keep that information confidential while you are still alive and capable, but available to the one person who needs it when you are not able to pass it along in person. Let us know if you need help with this project; we might have some ideas about how to manage the competing interests.

Feel free to update our information. Many of our clients send us periodic updates of their assets, titles and information. We do not charge to glance at those forms as they arrive, and that means there is at least one other place your family might look for roughly current information. We will simply hold the information in your file, to be updated again when we next hear from you.

We hope you enjoy perfect health, and that your estate plan turns out not to have been needed. This is one instance in which it is good if it turns out you didn’t need to expend the funds. But please help us so that if something should happen, we can make your estate plan work the way you intended. And we’re looking forward to seeing you in five years (or sooner) to update.

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Two Life Insurance Beneficiary Designations Require Litigation

APRIL 28, 2003 VOLUME 10, NUMBER 43

When people consider “estate planning” they usually are thinking about preparing a will. Sometimes the common conception of estate planning includes preparing a trust as well, and often durable powers of attorney are also part of the plan. But two recent cases demonstrate that “estate planning” is really much more—it includes the titling of assets and beneficiary designations as well. The most carefully-considered estate plan may fail if those other issues are not also dealt with at the same time.

Lori Flanigan was divorced and had two children when she married her second husband, Craig Munson. Ms. Flanigan had two life insurance policies through her work totaling $217,600. Her divorce agreement required her to name the children as beneficiaries on her life insurance, but she had not gotten around to completing a beneficiary designation form when she died in 1995.

Her insurance policies provided that they would be paid to a surviving spouse if she had not designated a beneficiary, and so the proceeds were distributed to Mr. Munson. The children’s grandparents (who took custody after Ms. Flanigan died) then filed a lawsuit to impose a constructive trust on the remaining insurance proceeds and Mr. Munson’s home, since he had used some of the proceeds to pay off his mortgage and other debts.

The trial judge denied the grandparents their requested relief, but the New Jersey Supreme Court agreed that the insurance proceeds should go to the children. It ordered the money transferred to the children’s benefit—eight years and thousands of dollars in legal fees after her death. Flanigan v. Munson, April 3, 2003.

Daniel Lambert was not so lucky. He argued that his mother’s life insurance policy should be part of her estate, and that her will specified that he was to receive a portion of that estate. Unfortunately for him, whatever his mother’s intentions might have been she had named her daughter Suella Southard as beneficiary.

Another sibling, brother Steven Powell, was prepared to testify that their mother had always intended that the life insurance policy should be used to pay the costs of handling her estate and then distributed to the children according to her will. He was not allowed to testify, however, because of a long-standing court rule prohibiting testimony about conversations with deceased persons, the so-called “Dead Man’s Statute.” The Indiana Court of Appeals refused to permit imposition of a constructive trust on the life insurance proceeds. Lambert v. Southard, April 1, 2003.

The moral: “estate planning” requires consideration of beneficiary designations and account titles as well as signing of a will, trust and powers of attorney. Even a carefully-drafted estate plan, including a will, a living trust and both financial and health care powers of attorney, can be altered or frustrated by incorrect (or missing) beneficiary designations, joint tenancies, “payable on death,” “transfer on death” or “in trust for” account titles or other, similar arrangements.

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