Everything You Need To Know about Beneficiary Designations for Financial Accounts

Financial Assets - car keys and moneyAn essential part of the estate planning process is reviewing your beneficiary designations and how your assets will pass. The beneficiary is the person who receives the assets of your estate after all debts are satisfied.

There are four general ways assets pass at death: through rights of survivorship, through beneficiary designation, through probate (with or without a will) and through a trust.

Rights of Survivorship: This refers to how property jointly held between two or more individuals is distributed. Upon your death, your interest immediately passes to the surviving joint owners. How such jointly-held property is titled supersedes the terms of your will or other estate planning documents. Real Estate or Financial Accounts held as joint tenants with rights of survivorship (JTROS) passes to the surviving joint tenant.

Beneficiary Designation: Property that lists a “transfer on death” beneficiary (TOD) or a “payable on death” beneficiary (POD) passes directly to the named beneficiary, avoiding probate. Under a POD or TOD arrangement, the property is automatically passed to the beneficiary upon your death. This is unlike a will, since with a will, property ownership does not change until the probate process is completed and the executor of the estate distributes the property to the designated beneficiaries under the will.

The two terms – transfer on death and payable on death – seem similar, but they differ in the type of account each applies to, and are used in different circumstances. With either account, the beneficiary has no rights to the account until the death of the owner of the account.

  • TOD applies to property that you own. That property (such as a car) will be transferred at your death to the named beneficiary, who can do what they like with it.
  • POD and TOD also applies to money and bank accounts. Money is still considered property, but a bank account in your name will not remain open after your death. The account is paid after your death to your beneficiary of choice, who can then do what they want with the money. The bank account must be closed in the process.

You may name anyone you choose as a TOD or POD beneficiary on your financial accounts and vehicle titles. When property passes to a joint owner, TOD, or POD, it passes outside of your estate. If you wish to avoid probate, you must ensure that all of your property passes outside of your estate, directly to a beneficiary or joint owner.

Another beneficiary designation is sometimes referred to as an ITF or “in trust for” account. For example, upon your death, a bank account will pass to your ITF beneficiary. During your lifetime, they have no claim against the account. With this account, the designated beneficiary has an “equitable” or “beneficiary” interest in the account balance. The named owner of the account holds the funds as a trustee for the beneficiary as a “trustee” on behalf of the beneficiary.

With POD, TOD and ITF accounts, the named owner can do anything with the monies or property until the owner dies and the account or property is then transferred to the named beneficiary.

Probate: Assets that pass through probate are individually titled assets which you own in your own name and that do not have POD/TOD/ITF beneficiary designations or other methods of title designations such as jointly held assets with rights of survivorship, or tenant in common. Probate property is distributed according to the terms of your will or by your state’s intestacy laws if you died without a valid will.

There are significant post-mortem benefits to having ITF and/or TOD/POD accounts:

  • The accounts are solely under your control during your lifetime
  • They are revocable
  • Upon your passing the beneficiary merely needs to go to a bank with your death certificate to claim the funds
  • No attorney is typically required

The transfer of your funds at your death is inexpensive and almost instantaneous. If you trust your beneficiaries to make wise decisions, make sure to establish your financial accounts as ITF and/or TOD/POD accounts.

To begin your estate planning process, please contact us at Aaron J. Goldberg, PLC.

 

 

“Used with permission 2016”

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Attorneys with Aaron J. Goldberg, PLC are members of the Vermont Bar Association and the National Academy of Elder Law Attorneys.