A common estate planning goal among Floridians is probate avoidance. Many people accomplish this goal by establishing a well drafted and properly funded Living Trust. Other people turn to Payable on Death Accounts, meaning that when the owner passes away, the asset, such as a bank or brokerage account, goes directly to a death beneficiary, without the need for probate.
While Payable on Death accounts can be useful as an estate planning tool, many people are not aware of their possible drawbacks:
“Too Many Indians and No Chief”
If a person’s estate passes automatically to all the children via POD accounts, it leaves too many Indians and no chief. There will be funeral expenses, income tax, and other outstanding obligations. Will all the kids pitch in a part of their inheritance to pay the bills? What if one of them decides he’s keeping all his money and refuses to participate? With a Living Trust, or a Will, the money goes into one pot and either the Successor Trustee in the case of a Trust, or the Personal Representative in the case of a Will, is in charge of it all.
When the Beneficiary is a Minor
If a minor child receives funds POD, a court guardianship is required to appoint someone to handle the money. A child’s parents do not always automatically get to manage the child’s inheritance.
When Certain Beneficiaries Should Not Receive an Outright Inheritance
Even an adult beneficiary may be someone who should not receive an outright inheritance. An example is a beneficiary who is in debt and whose creditors will leap on the inheritance. Another example is a beneficiary who is not fiscally prudent, and who would be better off if you place some strings on how his inheritance will be distributed to him and for what purposes it may be used.
When Beneficiaries May Not Receive What You Intend
Using POD accounts as a primary estate planning tool may result in unexpected and unpleasant situations for your heirs. For example, if you have a bank account with both your sons as co-beneficiaries and one passes away, the surviving son will get it all, even if you wanted your late son’s children to get their deceased father’s portion. Another scenario: You have two brokerage accounts which at the moment are about equal in value. Your daughter is the beneficiary of Account A; your son is the beneficiary of Account B. If the value of each of the accounts turns out to be dramatically different when you pass away, one of the children will draw the short straw, even if your intention was for them to get equal inheritances. Obviously, this arrangement is not a recipe for family harmony.
In all the examples above, you could use a Will, specifying that upon your passing a Testamentary Trust is established. But because your funds are passing through a Will, probate will still be required. That is among the reasons a Living Trust is almost always the better tool for the purposes of probate avoidance.