Payable on Death: It’s Not Just for Bank Accounts

Written By: Jennifer Lear

Planning for what is unforeseeable is challenging, but planning for what can be foreseen, death and taxes, can save money and time for family members. Sound financial counseling includes encouraging clients to contemplate an estate plan to ease the burden on their family members after their death. Clients may not view themselves as having enough assets to warrant the services of an estate planning attorney, but most can benefit from appropriate titling and estate planning tools to help achieve their goals.

Probate is the court supervised process by which a person’s assets and debts are disposed of and transferred pursuant to a will or intestacy. The cost of probate varies greatly depending on the state, the amount of assets, whether an attorney is needed, and the complexity and value of the assets. The probate process can be expensive, time-consuming, and stressful for surviving family members who are often adult children who may not live nearby.

Two key factors to consider when contemplating the disposition of assets upon one’s death are to (1) create a simplified process for the heirs, and (2) title assets to ensure that heirs incur minimal costs. This can be achieved by setting up every possible asset to transfer on death to a designated beneficiary or multiple beneficiaries.

Bank accounts, certificates of deposit, IRAs, investment accounts, stocks, bonds, and cash can all be titled to transfer to a designated beneficiary upon death. Depending on state law, cars, boats, and even real estate also can be designated to transfer on death.  The transfer on death designation keeps all of this property outside of the estate and bypasses probate and the fees that go with it.

State law determines how real property, typically land and real estate, can be titled and transferred. Slightly over half of the states have statutes that allow for a “life estate deed” or a “transfer on death” deed to transfer title of real property. In Florida, this is called a “Lady Bird deed,” named after former U.S. First Lady, Claudia Alta Taylor “Lady Bird” Johnson. The owner retains the right to live in the home until death, at which time the beneficiary becomes the legal owner of the property.

When it comes to estate planning, one size does not fit all.

Another potential advantage of the Lady Bird Deed is that the beneficiary must agree if the property will be refinanced or a reverse mortgage is attained. Even in states where this agreement is not statutorily mandated, as a practical matter, such agreement is routinely sought. This type of deed could prevent an elderly person from granting a reverse mortgage without necessarily understanding the consequences, advantages and disadvantages, forcing a conversation with other family members or financial professional.

Payable on death deeds do not actually transfer ownership, so they typically do not trigger any issues if the owner applies for Medicaid. However, Medicaid rules change frequently and an estate planning attorney is in the best position to determine whether such a conveyance is appropriate.

A will is still necessary as a catch-all for personal property such as furniture, household items, heirlooms, and any other items that would not have a legal title. In many states, if the value of the assets to be disposed by a will are under $100,000, or sometimes even as small as $50,000, an unnecessarily lengthy and potentially expensive probate process can potentially be avoided.

When it comes to estate planning, one size does not fit all. There are many estate planning tools that can be used to avoid probate, save money, and achieve simplicity even for those who might not see themselves as needing an estate plan. Clients should be made aware that their choices are not limited to merely a trust or a will. Designating payable on death beneficiaries can save clients and their family members time, stress and money when death inevitably occurs.