Kiplinger’s recent article entitled “TOD Accounts Versus Revocable Trusts – Which Is Better?” explains that a TOD account typically deals with distributing stocks, brokerage accounts, or bonds to the named beneficiary when the account holder dies. A POD account is similar to a TOD account. However, it handles a person’s bank assets (cash), not their securities.
Both TOD and POD accounts are quick and simple ways of avoiding probate. That can be slow, expensive, public, and possibly messy. Financial institutions offer TOD and POD at their discretion, but almost all major brokerage houses and investment houses now have these types of accounts, and most banks for standard bank accounts. Many even let you handle this online.
The significant benefit of using a POD or TOD account is probate avoidance. As mentioned, TOD and POD accounts avoid the probate process by naming a beneficiary or beneficiaries to inherit the asset directly when the account owner passes away. These accounts can distribute assets quickly and seamlessly to the intended beneficiary.
However, there can be creditors, expenses of administering the decedent’s estate, and taxes when someone passes away. The person or persons responsible for administering the decedent’s estate are typically empowered under the law to seek contributions from the POD and TOD beneficiaries to pay those liabilities. If the beneficiaries don’t contribute voluntarily, there may be no choice but to file a lawsuit to obtain the contributions. Beneficiaries may have spent those assets or have other circumstances, such as involvement in a lawsuit or a divorce. Consequently, these situations will complicate turning over those assets.
A trust lets you plan for incapacity, and if the trust’s creator becomes incapacitated, a successor or co-trustee can assume management of the account for the benefit of the creator. With a POD or TOD account, a durable power of attorney would be required to have another person handle the account. Financial institutions can be reluctant to accept powers of attorney if the documents are old or don’t have the appropriate language.
A trust allows you to plan for your beneficiaries. Suppose your beneficiaries are minors, have special needs, have creditor issues, or have mental health or substance abuse issues. In that case, trusts can hold and manage assets to protect those assets for the beneficiary’s use. A trustee can also manage inheritances over long periods with a trust.
Although in some cases, POD and TOD accounts can be appropriate for probate avoidance, their limitations at addressing other issues can cause many individuals to opt for a revocable trust. Talk to an experienced estate planning attorney to see what’s best for you and your family.
Reference: Kiplinger (Dec. 2, 2021) “TOD Accounts Versus Revocable Trusts – Which Is Better?”
