How Joint Accounts and TOD Can Torpedo An Estate Plan

ruin estate plan

You just met a nice person at a bank, you did not remember her position,
who told you there might be a way to avoid the horrors of probate by titling all of
your accounts jointly with one of your children. On the other hand maybe you
received information from a friend or neighbor who did it. An on-line advisor might
recommend that you specify all of your accounts as TOD (transfer on death) or
POD (payable on death) again to avoid probate. Were they right? The answer as
in so many cases is “it depends.”

First, probate in Pennsylvania is not the complicated process experienced
in many other states. Sure, there are rules to follow and these rules have become
somewhat more complicated in recent years but, generally speaking, unless there
are some unusual assets or circumstances or conflict among beneficiaries there is
a straightforward way to resolve an estate. With more than one beneficiary it
should be concluded with a Family Settlement Agreement usually prepared by an
attorney.

Sometimes joint titling and payable on death works especially if there is
only one beneficiary such as an only child or if the joint account owner or POD is
your spouse. In fact, as to spouses, joint accounts is usually the preferred way to
go.

However, many individuals, on the death of their spouse might think it
easier just to name one of the children as joint or payable on death on all accounts
or joint on all real estate trusting that child would “share” with all other adult
children. This is often done not realizing the provision in the Will that clearly states
assets are to be equally divided is overridden by titling. Here are some important
facts.

(1) When you name one child as joint or transfer on death or payable on
death that child is not legally obligated to share with anyone. It does not matter
what the Will says. So often as an estate planning attorney I hear “John” is an
honest person and will “do right” by his siblings sharing anything equally when he
inherits by joint titling or transfer on death. After hearing this I raise some
possibilities. Suppose John, shortly after you die, dies himself. Then the assets
go directly to his estate and not usually to the individuals you originally intended. I
also ask whether John is married. If he places the assets he receives through joint
ownership into a joint account with his spouse, the assets go to his spouse and not
to his siblings. If your son has creditors, the creditors could try to attach the assets. If he goes through a divorce, depending on how they are handled after and depending on the laws of the state, the assets
could be exposed in divorce. The result is that naming one person as joint on accounts or transfer on death or payable on death when you really want it to be shared among your children has risks that are usually not outweighed by any benefit of avoiding probate. Probate then is better.

(2) Liquidity is an issue. One point often overlooked is whether an
estate will have enough liquidity to pay expenses on death. For instance, if you
give your house to one child and your bank accounts to another where will the
funds be taken from to pay inheritance taxes and other estate expenses? If you
name all of your accounts payable on death, your beneficiary can receive them
directly but will still owe inheritance tax on the value. Can your beneficiary be
depended upon to pay the taxes after receiving the full balance of the accounts?
Having completed your estate documents, you might believe that is enough.
Still, you have one very significant step to take. You must examine your assets to
see how they are titled and also examine your beneficiary designations for life
insurance and retirement funds – IRA’s, 401(k)’s, 403(b)’s. If you have not
considered these, your estate plan is incomplete and your assets may be directed
in a very different manner than you expected on your death.

When considering your estate plan it is best to play out all the possibilities
and get help if the questions cannot be easily answered.

About the Author Janet Colliton

Esquire, Colliton Law Associates, P.C. Janet Colliton has practiced law for over 38 years, 37 of them in Chester County, Pennsylvania, a suburb of Philadelphia. Her practice, Colliton Law Associates, PC, is limited to elder law, Medicaid, including advice, applications and appeals, and other benefits planning including Veterans benefits, life care and special needs planning, guardianships, retirement, and estate planning and administration.

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