Payable-on-Death Bank Accounts
Payable-on-death bank accounts offer one of the easiest ways to keep money -- even large sums of it -- out of probate. All you need to do is fill out a simple form, provided by the bank, naming the person you want to inherit the money in the account at your death.
As long as you are alive, the person you named to inherit the money in a payable-on-death (P.O.D.) account has no rights to it. If you need the money -- or just change your mind about leaving it to the beneficiary you named -- you can spend the money, name a different beneficiary, or close the account.
At your death, the beneficiary just goes to the bank, shows proof of the death and of his or her identity, and collects whatever funds are in the account. The probate court is never involved.
You can turn almost any account, whether it's yours alone or you own it jointly with your spouse or someone else, into a P.O.D. account. Most joint accounts come with what's called the " right of survivorship," meaning that when one co-owner dies, the other will automatically be the sole owner of the account. So if you and your spouse have a joint account, when the first spouse dies, the funds in the account will become the property of the survivor -- without probate. If you add a P.O.D. designation, it will take effect only when the second spouse dies. Then, whatever is in the account will go to the P.O.D. beneficiary you named.
Funds in retirement accounts such as IRAs and 401(k)s do not have to go through probate after your death. The beneficiary you've named can claim the money directly from the account custodian.
When you open an IRA or 401(k) account, the forms you fill out will ask you to name a beneficiary. You will probably also be given the opportunity to name an alternate (sometimes called " secondary") beneficiary, who will inherit the money if your first choice dies before you do or at the same time.
If you're single, you're free to choose whomever you want as the beneficiary.
If you're married, your spouse may have certain rights to some or all of the money:
- If you have a 401(k) account, your spouse is entitled to inherit the money unless he or she agrees, in writing, to your choice of someone else.
- If you live in a community property state, chances are your spouse owns half of what you have socked away in a retirement account. (Community property states are Arizona, California, Idaho, Louisiana, New Mexico, Nevada, Texas, Washington and Wisconsin; in Alaska, couples can sign an agreement making some or all of their property community property.) If any of the money you contributed was earned while you were married, that money remains " community property," and your spouse owns half.
Many Americans now have sizable amounts of money tied up in corporate and government securities instead of plain old bank accounts, savings bonds or certificates of deposit. And most of these people can now leave their securities to their loved ones without probate.
Almost every state has now adopted a law (the Uniform Transfer-on-Death Securities Registration Act) that lets you name someone to inherit your stocks, bonds or brokerage accounts without probate. It works very much like a payable-on-death bank account. When you register your ownership, either with the stockbroker or the company itself, you make a request to take ownership in what's called " beneficiary form." When the papers that show your ownership are issued, they will also show the name of your beneficiary.
After you have registered ownership this way, the beneficiary has no rights to the stock as long as you are alive. You are free to sell it, give it away, or name a different beneficiary. But on your death, the beneficiary can claim the securities without probate, simply by providing proof of death and some identification to the broker or transfer agent. (A transfer agent is a business that is authorized by a corporation to transfer ownership of its stock from one person to another.)
Transfer-on-Death Registration for Vehicles
So far, only two states, California and Missouri, offer car owners the sensible option of naming a beneficiary, right on the registration form, to inherit the vehicle. The practice should spread; it's a simple, effective way for folks to pass on their cars, trucks and small boats.
All you do is apply for a certificate of car ownership in " beneficiary form." The fee is the same as for a standard certificate. The new certificate lists the name of the beneficiary (or more than one), who will automatically own the vehicle after your death. The beneficiary you name has no rights as long as you are alive. You are free to sell or give away the car, or name someone else as the beneficiary.
If you own the vehicle with someone else -- say, your spouse -- you can still designate a beneficiary. The beneficiary will inherit the vehicle only after both you and the other owner have died.
Several forms of joint ownership -- joint tenancy, for example -- allow you to avoid probate when the first owner dies.
Many couples conclude that holding title to their major assets in a form of joint ownership that avoids probate is all the estate planning they want to engage in, at least while they are younger. The most attractive features of this strategy are its simplicity and economy. To take title with someone else in a way that will avoid probate, you usually don't have to prepare any additional documents. All you do is state, on the paper that shows your ownership (a real estate deed, for example), how you want to hold title.
When one owner dies, it's easy for the survivor to transfer the property into his or her name alone, without probate. After that, however, the survivor will have to find another method to avoid probate on his or her death.
Joint Tenancy with Right of Survivorship
Property owned in joint tenancy automatically passes, without probate, to the surviving owner(s) when one owner dies. Joint tenancy often works well when couples (married or not) acquire real estate, vehicles, bank accounts, securities or other valuable property together. Setting up a joint tenancy is easy, and it doesn't cost a penny.
In Texas, you need a separate written agreement. To set up a joint tenancy in Texas, all joint tenants must sign an agreement. For example, if you want to create a joint tenancy bank account, specifying your arrangement on the bank's signature card isn't enough. A bank or real estate office should be able to give you a fill-in-the-blank form that will do the trick.
After one joint owner dies, generally all the new owner has to do is fill out a straightforward form and present it, with a death certificate, to the keeper of ownership records: a bank, state motor vehicle department, or county real estate records office.
Joint tenancy is usually a poor estate planning choice when an older person, seeking only to avoid probate, is tempted to put solely owned property into joint tenancy with someone else. Adding another owner this way creates several potential headaches:
- You're giving away property. If you make someone else a joint tenant of property that you now own yourself, you give up half ownership of the property. The new owner has rights that you can't take back. For example, the new owner can sell or mortgage his or her share -- or lose it to creditors.
- You may have to file a gift tax return. If the value of the interest you give to a new co-owner (except your spouse) exceeds $10,000 in one year, you must file a gift tax return with the IRS. No tax is actually due, however, until you give away a large amount (currently, more than $650,000) in taxable gifts. There's one big exception: If two or more people open a bank account in joint tenancy, but one person puts all or most of the money in, no gift tax is assessed against that person. A taxable gift may be made, however, when a joint tenant who has contributed little or nothing to the account withdraws money from it.
- It may spawn disputes after your death. Many older people make the mistake of adding someone as a joint tenant to a bank account just for "convenience." They want someone to help them out by depositing checks and paying bills. But after the original owner dies, the co-owner may claim that he or she is entitled, as a surviving joint tenant, to keep the funds remaining in the account. In some instances, maybe that's what the deceased person really intended -- it's too late to ask. Sadly, this sort of confusion often leads to bitter family rifts, some of which are fought out in court.
In some states, married couples often take title not in joint tenancy, but in " tenancy by the entirety" instead. It's very similar to joint tenancy, but is limited to married couples only. The two forms of ownership are so much alike that it usually makes little practical difference which is used; both avoid probate in exactly the same way.
If you are married and live in a community property state, another way to co-own property with your spouse is available to you: community property. In some states, community property doesn't have to go through probate; in others, it does.
If you live in Arizona, Nevada, Texas or Wisconsin, you can add the " right of survivorship" to your community property. Then, when one spouse dies, the other automatically owns the deceased spouse's half of the couple's community property. Transferring title to the surviving spouse is simple. The exact steps depend on the type of property, but generally all the new owner has to do is fill out a straightforward form and present it, with a death certificate, to the keeper of ownership records: a bank, state motor vehicle department, or county real estate records office.
California and New Mexico offer simplified procedures for transferring community property to a surviving spouse, under certain conditions. In the rest of the community property states, community property must go through probate like other kinds of property.
Revocable Living Trusts
Living trusts were invented to let people make an end-run around probate. The advantage of holding your valuable property in trust is that after your death, the trust property is not part of your estate for probate purposes. (It is, however, counted as part of your estate for federal estate tax purposes.) That's because a trustee -- not you as an individual -- owns the trust property. After your death, the trustee can easily and quickly transfer the trust property to the family or friends you left it to -- without probate. You specify in your trust document (which is similar to a will) whom you want to inherit the property.
Giving away property while you're alive helps you avoid probate for a very simple reason: if you don't own it when you die, it doesn't have to go through probate. That lowers probate costs because, as a general rule, the higher the monetary value of the assets that go through probate, the higher the expense. If you give away enough assets, your estate might even qualify for a streamlined " small estate" probate procedure after your death. (These procedures are discussed below.)
If you are fortunate enough to be considering making lots of large gifts, you should learn a little about the federal estate and gift tax. If you give more than $10,000 to one recipient in one calendar year, you'll have to file a federal gift tax return. You won't actually have to pay any tax, however, unless you give away a total of at least $650,000 during your life or leave more than that much at your death.
If you structure your gifts properly and watch the calendar, you can probably give away as much money as you want without worrying about tax. All of these gifts are exempt from federal gift tax:
- Gifts of up to $10,000 per any recipient per year.
- Direct payment of someone's tuition or medical bills.
- Gifts of any amount to your spouse (as long as he or she is a U.S. citizen).
- Donations of any amount to tax-exempt charities.
Almost every state now offers shortcuts through probate -- or a way around it completely -- for " small estates." Each state defines that term differently. Because of the way the laws are written, however, many large estates, worth hundreds of thousands of dollars, are eligible for special transfer procedures that speed property to inheritors.
There are two basic kinds of probate shortcuts for small estates:
Claiming property with affidavits -- no court required. If the total value of all the assets you leave behind is less than a certain amount, the people who inherit your personal property -- that's anything except real estate -- may be able to skip probate entirely. The exact amount depends on state law, and varies hugely. California's limit, $100,000, is the highest. If the estate qualifies, an inheritor can prepare a short document stating that he or she is entitled to a certain item of property under a will or state law. This paper, signed under oath, is called an affidavit. When the person or institution holding the property -- for example, a bank where the deceased person had an account -- receives the affidavit and a copy of the death certificate, it releases the money or other property. Simplified court procedures -- another option for small estates (again, as defined by state law) is a quicker, simpler version of probate. The probate court is still involved, but it exerts far less control over the settling of the estate. In many states, these procedures are straightforward enough to handle without a lawyer, so they save money as well as time.
||Easy to create, using a form provided by the bank or agency.||Limited to bank accounts and some government securities.|
|Naming beneficiary of pension plan or retirement account||Easy to do. Beneficiary inherits all funds in the account at your death.||None, unless particular program imposes limits.|
|Transfer-on-death registration for securities||Easy to do. All you do is name, on the registration form, someone to inherit the securities at your death.||Not available in all states.|
|Transfer-on-death designation for motor vehicles||Easy to do. All you do is name, on your registration form, someone to inherit your vehicle.||Currently available only in California and Missouri, but other states are considering similar programs.|
|Joint tenancy with right of survivorship||Easy to create.||If you don't already own property in joint tenancy, you may not want to add another owner, who could sell his share. (For larger estates, there are negative gift tax consequences, too.) Can be a problem if a co-owner becomes incapacitated. No probate avoidance if all joint owners die at once.|
|Tenancy by the entirety||Easy to create.||Available only in some states; limited to married couples. Can be a problem if one spouse becomes incapacitated.|
|Community property with right of survivorship||All the benefits of community property ownership, plus probate avoidance when one spouse dies.||Available only to married couples in four states: Arizona, Nevada, Texas and Wisconsin.|
|Revocable living trust||Flexible, private. Easy to create. You keep control over property during your life.||Some paperwork involved. May need attorney if your estate is complicated.|
|Gifts of property made while you're alive||Reduces amount of property in your estate, which avoids both probate and estate taxes.||You lose control over property given away while you're alive. Large gifts use up part of your federal gift/estate tax exemption. Insurance policies must be given away at least three years before death, or proceeds are included in your taxable estate.|
|State laws that allow simplified probate proceedings||Exempts certain property from formal probate.||Applies only to small estates; you may still need an attorney to explain the technicalities of your state's laws.|
Copyright 1999 Nolo.com Inc.