By Eric Reich
In a recent conversation with someone regarding estate planning, they posed the question, “why not just make all of my accounts Transfer on Death?” You’ll frequently hear me say that there is no perfect solution when planning your estate or simplifying your retirement life. The reality is that we all have unique needs in those areas. Trying to force simplicity rarely works out well.
For starters, let’s define what a Transfer on Death (TOD) or Payable on Death (POD) account is. These accounts are used for types of accounts that do not have a beneficiary designation like an IRA, Roth IRA, annuity, or 401(k) does. TOD is for investments, and POD is used for non-securities such as a bank account. Normally, your will would handle the transfer of these types of assets. The issue is that many people don’t want these types of assets to be distributed via a will because that would typically require them to go through the probate process, which most people hate. Bear in mind that not all states’ probate processes are awful. In some states, the process is relatively painless, though some are downright horrible. This is what leads many people to consider a TOD/POD option. Another reason they are popular is because they are very easy to set up and can be done without the assistance of an attorney. I know everyone wants to save money by not paying an attorney, hence the online estate planning options. However, I would strongly advise against this as being your baseline of thinking. A qualified estate planning attorney is the key component in making sure all of your intended wishes are carried out.
So, what does a TOD/POD do? In essence, upon death it acts like a joint account. Only upon death does it act that way. When you pass, your accounts can be transferred very quickly and easily to the intended beneficiary. Since the probate process can take a while, your beneficiary can’t always access your funds in a timely manner without a TOD/POD.
So far, this type of account seems pretty appealing. Well, here are a few of the downsides:
- TOD/POD accounts reduce the amount of money inside the estate that may be needed to pay the expenses of the estate. If everything in the estate is titled as TOD/POD or passes via a named beneficiary (IRA, Roth IRA, annuity, 401(k), etc.) then there might not be enough money left in the estate to pay all of the final expenses of the estate.
- A TOD/POD account is not a joint account. As such, unless you are deceased, nobody can help you with your finances unless you have a power of attorney. This is one of the reasons why you still need a qualified estate planning attorney. You also can’t change beneficiaries easily for these types of accounts if you are incapacitated.
- Having a TOD/POD account directed to go to a disabled individual can cause them to lose all of their governmental benefits because the amount distributed to them might disqualify them financially for the benefits.
- Unlike a trust, there is no control over the money for TOD/POD accounts once you are gone. There is nothing stopping an 18-year-old beneficiary from taking the funds and buying a new car, gambling it away, etc. once they receive the money. A trust can protect your beneficiaries from both creditors and themselves.
There are a few other issues as well, but you get the idea. While a TOD/POD can be a very useful tool in the right situations, they are not intended to be the answer to every problem. They should be used in the context of the rest of your overall estate plan but not as the plan itself.
Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment advisory services offered through Kestra Advisory Services, LLC (Kestra AS), an affiliate of Kestra IS. Reich Asset Management, LLC is not affiliated with Kestra IS or Kestra AS. The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation. To view form CRS visit https://bit.ly/KF-Disclosures.
Eric is President and founder of Reich Asset Management, LLC. He relies on his 25 years of experience to help clients have an enjoyable retirement. He is a
Certified Financial Planner™ and Certified Investment Management AnalystSM (CIMA®) and has earned his Chartered Life Underwriter® (CLU®) and Chartered Financial Consultant® (ChFC®) designations.
