Although Wills are often not difficult to probate in Texas, many times the probate process of determining that the Will is valid (so that the Executor can pay the debts of the estate of the deceased and transfer the assets in accordance with the Will) can be costly and time-consuming. As a result, many want to avoid the potential hassle, cost and delay of following the state laws required under the probate process when you have to validate a Will.
Beneficiary designations supersede probate. So, for example, if you simply go to the bank and name a beneficiary to your account (called a Payable on Death Account and more commonly known as a POD account), or a transfer on death account (more commonly known as a TOD account), the beneficiary designation form (whether at a investment firm, bank or other financial institution) controls instead of your Will as to that account. The beneficiary designation does not give any access or control over the account holder’s account to the beneficiary during the account holder’s life. If the account was a joint account instead, then your funds could be subject to your joint account holder’s creditors. Furthermore, if your joint account holder has named someone else as an agent under a power of attorney, then the joint account holder’s agent could have access to your account (what if you named your child as your joint account holder who has named a now-estranged spouse as their agent?). The beneficiary would simply provide a death certificate to get the funds from the account. So, since completing a beneficiary designation form is simple and cheap, it sometimes is the answer. However, there are numerous reasons why a POD account is often not best. Some of the problems are as follows:
PROBLEM 1: Beneficiary could have creditors.
Even if your beneficiary presently does not have creditors when you establish the beneficiary designation of your account, your beneficiary could have creditors at the time of your death. This would subject all funds be available for collection by the beneficiary’s creditors. With proper planning in a Will or trust, creditor protection could be achieved.
PROBLEM 2: Beneficiary could be disabled or on public benefits.
If your beneficiary is receiving means-tested public benefits, the inheritance from the POD account will jeopardize benefits such as Medicaid. Even if the beneficiary is not on public benefits but is disabled, guardianship over the beneficiary’s inheritance could be avoided with proper planning. Furthermore, a POD account owner has no control of whether a beneficiary will be disabled at the time of the account holder’s death.
PROBLEM 3: Beneficiary is a minor or too immature to handle funds.
Similar to the beneficiary who is disabled, a beneficiary who is a minor and inherits funds may require guardianship. Even if the beneficiary of the POD account has reached the age of majority, the beneficiary may not spend the funds wisely. A contingent trust within a Will or trust could have protected the beneficiary.
PROBLEM 4: Beneficiary is a spendthrift.
Beneficiaries don’t have to be young to be foolish with an inheritance and waste funds due to poor money management. A spendthrift trust created within a Will or trust could give protection that a simple POD account beneficiary designation would not.
PROBLEM 5: Beneficiary predeceases you.
If your beneficiary predeceases you, then is there a contingent beneficiary? If not, then your estate may have to go through probate (which is what you were trying to avoid). Furthermore, many financial institutions do not permit a per stirpes designation (a designation which allows the children of the deceased beneficiary to inherit what their parent would have received had they survived the POD account owner) on a beneficiary designation form. Financial institutions may not want to determine who is a child of the beneficiary and the liability if the financial institution was in error. Planning for this event in a trust or Will is simple.
PROBLEM 6: Beneficiary becomes an addict.
There are many addictions ranging from drugs to gambling. Trusts and Wills can provide protection that cannot be achieved through a simple beneficiary designation.
PROBLEM 7: Beneficiary has marital problems.
Although an inheritance is separate property in Texas, the beneficiary of the POD account may comingle funds and the funds could wind up in a manner not desired by the account owner.
PROBLEM 8: Who pays the bills if there is no representative and there are expenses of the account owner’s estate?
If the deceased had funeral expenses, medical bills and any taxes due, would the POD beneficiaries pay the bills? They may be forced to open an estate if a POD beneficiary doesn’t cooperate. This could lead to family discord that the account owner may not have contemplated.
PROBLEM 9: No tax planning.
Most Texans do not have large enough estates to worry about estate taxes, generation-skipping transfer taxes, etc. However, between COVID-19 and the national debt that presently exists in addition to statements of President Biden, it would not be surprising if more will be subject to these taxes requiring estate planning to reduce or eliminate such taxes.
PROBLEM 10: No ruling from the grave.
Some may prefer how and when a beneficiary receives funds. There can be incentives for financial success, educational success, etc. This type of planning is not accomplished by a simple beneficiary designation.
If the main reason for having a POD beneficiary was probate avoidance and any of the problems mentioned above are a concern, then a trust is the better answer. However, beneficiary designations are sometimes desirable and should be coordinated when considering your goals.
If interested in learning more about this article or other estate planning, Medicaid and public benefits planning, probate, etc., attend one of our free upcoming virtual Estate Planning Essentials workshops by clicking here or calling 214-720-0102. We make it simple to attend and it is without obligation.
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