If you do not create an estate plan, your state has one for you. It is called the Probate Code. Probate is an expensive and long drawn out process to organize and disperse your assets to people you may not want to inherit from you. Attorneys, the courts, and people appointed to be your estate’s representative make a lot of money if this happens. People that are disinherited by the process would probably be disappointed.
One popular way to avoid probate is to use a “TOD” account for savings or investments that are outside of a retirement plan account such as an IRA or 401(k). The “TOD” stands for “Transfer on Death”, and under these contractual agreements your assets transfer at the time you pass away directly to your named beneficiaries outside of the probate process. While TOD accounts are a relatively simple and inexpensive way for you to distribute assets and avoid probate, they are not necessarily ideal for all families. Here are three things to consider:
First, be aware that TOD arrangements supersede any wills or trusts. If you have a number of children and they are all listed as equal beneficiaries in your will or trust, they may be surprised if you deliver an asset to less than all of them through a TOD designation. You may create a lot of angst, disappointment or conflict within your family if you have three children, for example, but use a TOD designation to leave an asset to only one child. Therefore, you may want to make sure your TOD arrangements are consistent with any estate plan you have drafted. Document your intentions in such a way that your family (and their attorneys) are all clear about what you wanted to accomplish and your rationale for doing what you did. You may be leaving “X” asset to one child and “Y” asset to another child or children through TOD designations for reasons that are important to you and your family. A family meeting to discuss these matters may be a good idea.
Second, leaving an asset through a TOD arrangement to a young beneficiary may not be a great idea for your family. Children need guardians for their assets because they are rightly considered to be too young to know what to do with them, and guardians are appointed and supervised by courts. Despite your best intention to avoid your family being in probate court, they may end up there anyway if they must appear before a judge for their appointment and periodic supervision as guardian for a minor. Attorneys are usually involved in some form or fashion, so the cost of that along with the court’s fees must also be considered. A properly drafted trust should prevent this from happening.
Third, assets titled to a TOD arrangement are not readily available to your family in the event you are incapacitated. Let’s assume you have a TOD account with XYZ Brokerage or Mutual Fund Company in your name. The only way for your family to access those assets for your care or other expenses is through a power of attorney arrangement or, even worse, a court order. It could be cumbersome or problematic for your power of attorney (assuming you have one) to produce the documents that XYZ company requires of them to be able to withdraw funds on your behalf. This is particularly true if your power of attorney lives in a location remote from you. All of that could take time, and time may be of the essence for your family to be able to access those assets for you. If you do not have a power of attorney, someone would have to petition a probate court to be appointed to be your guardian. That likely takes more time, more effort, and more money. Titling assets to a trust would avoid these problems because a successor trustee will have been named that can likely act without much delay.
If you have any questions after having read this article, please contact one of the advisors at GBB at (916) 269-0671 or by completing our contact form.