Pension

What is a Transfer on Death (TOD) Account?

Transfer on Death accounts allow for assets to avoid probate and be transferred directly to a beneficiary after the death of the account holder.

Most married couples share a bank account from which either spouse can write checks and add or withdraw funds without approval from the other. When one spouse dies, the other owns the account. The deceased spouse’s will can’t change that.

This account is wholly owned by both spouses while they’re both alive. As a result, a creditor of one spouse could make a claim against the entire account, without any approval or say from the other spouse. Either spouse could also withdraw all the money in the account and not tell the other. This basic joint account offers a right of survivorship, but joint account holders can designate who gets the funds, after the second person dies.

Kiplinger’s recent article, “How Transfer-on-Death Accounts Can Fit Into Your Estate Planning,” explains that the answer is transfer on death (TOD) accounts (also known as Totten trusts, in-trust-for accounts, and payable-on-death accounts).

In some states, this type of account can allow a TOD beneficiary to receive an auto, house, or even investment accounts. However, retirement accounts, like IRAs, Roth IRAs, and employer plans, aren’t eligible. They’re controlled by federal laws that have specific rules for designated beneficiaries.

After a decedent’s death, taking control of the account is a simple process. What is typically required, is to provide the death certificate and a picture ID to the account custodian. Because TOD accounts are still part of the decedent’s estate (although not the probate estate that the will establishes), they may be subject to income, estate, and/or inheritance tax. TOD accounts are also not out of reach for the decedent’s creditors or other relatives.

Account custodians (such as financial institutions) are often cautious, because they may face liability if they pay to the wrong person or don’t offer an opportunity for the government, creditors, or the probate court to claim account funds. Some states allow the beneficiary to take over that responsibility, by signing an affidavit. The bank will then release the funds, and the liability shifts to the beneficiary.

If you’re a TOD account owner, you should update your account beneficiaries and make certain that you coordinate your last will and testament and TOD agreements, according to your intentions. If you fail to do so, you could unintentionally add more beneficiaries to your will and not update your TOD account. This would accidentally disinherit those beneficiaries from full shares in the estate, creating probate issues.

TOD joint account owners should also consider that the surviving co-owner has full authority to change the account beneficiaries. This means that individuals whom the decedent owner may have intended to benefit from the TOD account (and who were purposefully left out of the Last Will) could be excluded.

If the decedent’s will doesn’t rely on TOD account planning, and the account lacks a beneficiary, state law will govern the distribution of the estate, including that TOD account. In many states, intestacy laws provide for spouses and distant relatives and exclude any other unrelated parties. This means that the TOD account owner’s desire to give the account funds to specific beneficiaries or their descendants would be thwarted.

Ask an experienced estate planning attorney, if a TOD account is suitable to your needs and make sure that it coordinates with your overall estate plan.

Reference: Kiplinger (March 18, 2019) “How Transfer-on-Death Accounts Can Fit Into Your Estate Planning”

Common Mistakes with Beneficiary Designations

Questions about beneficiary designations are among the most common we hear from new clients in our law practice.  This is a topic that should be among those discussed by an estate planning attorney during your first meeting.

Many people don’t understand that their will doesn’t control who inherits all of their assets when they pass away. Some of a person’s assets pass by beneficiary designation. That’s accomplished by completing a form with the company that holds the asset and naming who will inherit the asset, upon your death.

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Assets with a beneficiary designation will not be distributed according to your will.

Kiplinger’s recent article, “Beneficiary Designations: 5 Critical Mistakes to Avoid,” explains that assets including life insurance, annuities and retirement accounts (think 401(k)s, IRAs, 403bs and similar accounts) all pass by beneficiary designation. Many financial companies also let you name beneficiaries on non-retirement accounts, known as TOD (transfer on death) or POD (pay on death) accounts.

Naming a beneficiary can be a good way to make certain your family will get assets directly. However, these beneficiary designations can also cause a host of problems. Make sure that your beneficiary designations are properly completed and given to the financial company, because mistakes can be costly. The article looks at five critical mistakes to avoid when dealing with your beneficiary designations:

  1. Failing to name a beneficiary. Many people never name a beneficiary for their retirement accounts. If you don’t name a beneficiary for retirement accounts, the financial company has it owns rules about where the assets will go after you die. For retirement benefits, if you’re married, your spouse will most likely get the assets. If you’re single, the retirement account will likely be paid to your estate, which has negative tax ramifications and may need to be handled through the costly and time-consuming probate courts. When an estate is the beneficiary of a retirement account, the assets must be paid out of the retirement account within five years of death. This means an acceleration of the deferred income tax—which must be paid earlier, than would have otherwise been necessary.
  2. Failing to consider special circumstances. Not every person should receive an asset directly. These are people like minors, those with specials needs, or people who can’t manage assets or who have creditor issues. Minor children aren’t legally competent, so they can’t claim the assets. A court-appointed conservator will claim and manage the money, until the minor turns 18. Those with special needs who get assets directly, will lose government benefits because once they receive the inheritance directly, they’ll own too many assets to qualify. People with financial issues or creditor problems can lose the asset through mismanagement or debts. Ask your estate planning attorney about creating a trust to be named as the beneficiary.
  3. Designating the wrong beneficiary. Sometimes a person will complete beneficiary designation forms incorrectly. For example, there can be multiple people in a family with similar names, and the beneficiary designation form may not be specific. People also change their names in marriage or divorce. Assets owners can also assume a person’s legal name that can later be incorrect. These mistakes can result in delays in payouts, and in a worst-case scenario of two people with similar names, can mean litigation.
  4. Failing to update your beneficiaries. Since there are life changes (like marriage and divorce for example), make sure your beneficiary designations are updated on a regular basis.
  5. Failing to review beneficiary designations with your estate planning attorney. Beneficiary designations are part of your overall financial and estate plan. Speak with your estate planning attorney to determine the best approach for your specific situation.

Beneficiary designations are designed to make certain that you have the final say over who will get your assets when you die. Take the time to carefully and correctly choose your beneficiaries and periodically review those choices and make the necessary updates to stay in control of your money.

Reference: Kiplinger (April 5, 2019) “Beneficiary Designations: 5 Critical Mistakes to Avoid”

Estate Planning for a Blended Family?

A blended family (or stepfamily) can be thought of as the result of two or more people forming a life together (married or not) that includes children from one or both of their previous relationships, says The Pittsburgh Post-Gazette in a recent article, “You’re in love again, but consider the legal and financial issues before it’s too late.”

Research from the Pew Research Center study shows a high remarriage rate for those 55 and older—67% between the ages 55 and 64 remarry. Some of the high remarriage percentage may be due to increasing life expectancies or the death of a spouse. In addition, divorces are increasing for older people who may have decided that, with the children grown, they want to go their separate ways.

elderly couple ARAG members
Getting married for the second time? Don’t forget to review your estate planning documents.

It’s important to note that although 50% of first marriages end in divorce, that number jumps to 67% of second marriages and 80% of third marriages end in divorce.

So if you’re remarrying, you should think about starting out with a prenuptial agreement. This type of agreement is made between two people prior to marriage. It sets out rights to property and support, in case there’s a divorce or death. Both parties must reveal their finances. This is really helpful, when each may have different income sources, assets and expenses.

You should discuss whose name will be on the deed to your home, which is often the asset with the most value, as well as the beneficiary designations of your life insurance policies, 401(k)s and individual retirement accounts.

It is also important to review the agents under your health care directives and financial powers of attorney. Ask yourself if you truly want your stepchildren in any of these agent roles, which may include “pulling the plug” or ending life support.

Talk to an experienced estate planning attorney about these important estate planning documents that you’ll need, when you say “I do” for the second (or third) time.

Reference: Pittsburgh Post-Gazette (February 24, 2019) “You’re in love again, but consider the legal and financial issues before it’s too late”

What’s the Difference Between Per Capita And Per Stirpes Beneficiary Designations?

A will covers the distribution of most assets upon your death. However, any assets that require beneficiary designations, like 401(k), IRAs, annuities, or life insurance policies, are distributed according to the designation for that account. A beneficiary designation takes precedence over the instructions in a will or trust.

Benzinga’s recent article addresses this question: “Estate Planning: What Are Per Capita And Per Stirpes Beneficiary Designations?” Have you changed the beneficiary designations, since the account or policy was first started? If you need to update your beneficiary designation, talk to the company responsible for maintaining the account. They’ll send you a form to complete, sign and return. Keep a copy for your own records.

You should also name a contingent beneficiary to receive the account, in case the primary beneficiary passes away before you can update the beneficiary list. Without a listed contingency, your account designation goes to a default, based on the original agreement you signed and the state law.

With per capita distribution, all members of a particular group receive an equal share of the distribution. Within a will or trust, that group can be your children, all your combined descendants, or named individuals. Under per capita, the share of any beneficiary that precedes you in death is shared equally among the remaining beneficiaries. Within a beneficiary designation, per capita typically means an equal distribution among your children.

Per stirpes distribution uses a generational approach. If a named beneficiary precedes you in death, then the benefits would pass on to that person’s children in equal parts. Spouses are generally not part of a per stirpes distribution.

Assume that you had two children. With per stirpes, if one child were to precede you in death, the other child would receive half, and the children of the deceased child would get the other half.

Create a list of all your accounts that have beneficiary designations and keep it with your will. If you don’t have a copy of the latest beneficiary designation form, write down the primary beneficiary, contingent beneficiary, and the date the beneficiary designation was last updated for each one.

Remember, it’s important to keep both your will and all beneficiary designations up to date.

Reference: Benzinga (December 26, 2018) “Estate Planning: What Are Per Capita And Per Stirpes Beneficiary Designations?”

Here’s More Insight into Why Estate Planning is Critical

Fox 5 NY says in the article “Why estate planning is important regardless of your age or wealth” that this is great time to begin talking to your loved ones about estate planning, especially older relatives and parents.

The key to a successful discussion depends upon the right approach.

Try to always make suggestions, rather than demands. One great way to start the conversation with family members, is to mention what you’re doing. You might say something like, “I just took care of my own estate planning. Have you done anything? Maybe we should talk about it.” That might get the conversation rolling.

Many people believe that, as they get older, they need a will. However, that’s just one piece of the puzzle: core estate planning includes a will, power of attorney, health care surrogate and asset protection.

For most of us, the asset we most want to protect is our home. One of the best ways to do that is through a trust. Depending upon the type of trust you use, it may also have tax advantages, could protect your home during a healthcare crisis and protect your home from your children’s creditors.

You also need to find people you trust to help with finances and health care. A power of attorney is a legal document in which you grant a person the authority to handle finances on your behalf.

Similarly, a healthcare surrogate is an individual who makes healthcare decisions, if you get sick or are in an accident and can’t make decisions for yourself.

You can use one person to do both or separate individuals for each role. You can opt for a family member or a trusted friend. However, either way it should probably be a younger person, who won’t be dealing with the same aging issues as you.

You should also note that your will doesn’t cover everything. Make certain that any beneficiaries designated in your retirement plans or life insurance and any additional names on joint bank accounts are current. The beneficiaries you appointed by a designation form will get the money in those accounts, no matter what it says in your will.

If all of this sounds a bit complex, don’t worry because an experienced estate planning or elder law attorney can help you with all of the forms and all of your questions. Just understand these three things before you visit an elder law firm: your assets, whose names are on the accounts and your wishes.

Reference: Fox 5 NY (December 12, 2018) “Why estate planning is important regardless of your age or wealth”

Avoid These Three Big Estate Planning Mistakes

The Street lists the “3 Worst Estate Planning Mistakes and How to Avoid Them.” These are issues that frequently derail an estate plan:

Lack of Information. Unwinding the various pieces of your estate can be a monumental task. Some folks leave this all to chance. They fail to leave their personal representative and loved ones with a complete and updated list of where everything is located and how to get to it.

Think about all the assets you’ve accumulated in a lifetime: real property, brokerage accounts, bank accounts, mutual fund holdings, IRAs, pensions and others. They’re hopefully all protected by a host of user names and passwords and maybe even by the answers to questions, like your first pet’s name.

While things like insurance policies are likely online, some of your holdings are not available electronically. In addition, other possessions are totally digital, and you should guard against cyber-theft and hacking. Create a list of all your user names and passwords for investment accounts and other financial holdings.

Beneficiary Designations Issues. It’s not uncommon for people to forget that they’re required to name beneficiaries for their retirement accounts, annuity contracts and insurance policies. Messing this up is a guarantee that your assets will wind up in probate. It can be an expensive and time-consuming legal process, where your wishes may be disregarded.

Outdated Plans. Sometimes, decades pass after estate documents are signed and put away. In the meantime, divorces and other life events happen, radically impacting the original estate planning objectives. In addition, changes in tax laws might impact your initial intentions. It’s smart to periodically review what is in your will and your beneficiary designations.

Reference: The Street (November 29, 2018) “3 Worst Estate Planning Mistakes and How to Avoid Them”

Do I Have All the Beneficiaries Set Up Correctly on My Assets?

The typical example is an ex-spouse getting all your retirement savings. However, what if you have a child with an opioid addition, you die, and he or she inherits hundreds of thousands of dollars—that vanish in less than a year?

The assets that you own can be passed to your family members in three basic ways: title of ownership is transferred, you name them to inherit assets in your will, or they are the designated beneficiaries named on your various banking and investment accounts and insurance policies.

Many of our assets are transferred through this beneficiary designation, yet we don’t spend enough time tracking and updating these names.

When’s the last time you’ve reviewed your beneficiaries? This question was explored in a recent InsideNoVa article, “Naming Beneficiaries: A Quick Tip to Reduce the Surprise Factor.”

For example, if your checking account is titled in your spouse’s and your name “with rights of survivorship” (WROS), you effectively co-own the account. That one should be all set, at least until the surviving spouse dies.

Your will instructs your executor on the transfer of any assets that aren’t transferred by title or contract. That’s probably at least some of your estate. Therefore, if you don’t have a will, make an appointment with an estate planning attorney to make sure you have this important document.

Next, the beneficiary designation contacts for assets like your retirement accounts, pension plans and insurance policies should be reviewed whenever there’s a major life event, like a birth or adoption of a child, a divorce, or a marriage.

Bigstock-Financial-consultant-presents--14508974Start the process by identifying all the accounts you own, including life insurance policies, annuities, investments, etc. that will pass by beneficiary designation. You should then see who the primary and secondary beneficiaries are for each. You can usually assign percentages to your beneficiaries. Therefore, you could name your spouse as primary beneficiary, 100%. Your children could then be secondary beneficiaries in equal shares.

Some contracts allow you to have your funds be distributed “per stirpes.” In that case, if you name your three children as primary beneficiaries, they each would receive a third. However, if your eldest son dies with you, with per stirpes, his share will go to his children.

In addition, there may be situations when you might designate a trust as a beneficiary. This can get complicated, so work with an experienced trust and estate attorney.

Don’t overlook this detail, as it can have a very big impact, and not always for the good, on your family and loved ones.

Reference: InsideNoVa (October 26, 2018) “Naming Beneficiaries: A Quick Tip to Reduce the Surprise Factor”

Making Smart Decisions About Your Pension

If you have a pension, you’ll have to make some decisions, when you are ready to retire.

The burden of saving for retirement shifted from employers to employees. It is now unusual for companies to offer pensions. If you’re lucky enough to have one, make your decisions wisely.

MP900382633It’s hard to imagine today, but years ago, it wasn’t unusual to stay with one company for a lifetime, then retire and collect a generous company-provided pension that lasted as long as you lived.

Investopedia’s recent article, “Choosing How and When to Receive Pension Benefits,” reminds us that times have changed. Pensions have been replaced in large part by 401(k)s or other employer-sponsored savings plans. Those fortunate enough to still have a pension, will make it a large part of their retirement plan. If you have a pension, you’ll have to make some decisions, when you are ready to retire.

The first choice is when to begin receiving pension benefits. Some plans offer payout options that like Social Security benefits. You can begin receiving benefits at 62, but you’ll get a smaller amount. If you wait until you’re 65, you’ll receive a bigger payout.

A critical decision is how you will receive your benefit payment. Many pension plans have a lump sum option that lets you cash out of the plan. You’ll also most likely have a few options for monthly payments. The lump sum payout avoids the possibility that your employer may default on your pension.

Most people who take a lump sum roll over the proceeds into an IRA, so they can control the tax consequences of the distribution. If you don’t take a lump sum, or if your plan doesn’t allow for one, you’ll need to decide how to receive your monthly payments. There’s typically an option of receiving payments for the rest of your life (a single life annuity) or selecting from a variety of survivor options (joint and survivor annuity) that allow for your beneficiary to continue to receive payments after your death.

If you choose payments for your life only, your monthly income will be higher. The survivorship options result in a reduced payment. If you are married, the IRS requires that the benefit from a qualified retirement plan be paid out as a survivorship option, unless both spouses designate a different form of payment. The best choice for you will depend on your personal circumstances.

When trying to decide, weigh factors such as your age, your spouse’s age, each of your life expectancies, your health, your health history, your spouse’s health and health history, along with the other sources of retirement income that might be available to you or your spouse, after one of you passes. It’s also important to consider whether you have life insurance, the impact the death of one spouse will have on your combined income and the impact on your combined expenses.

Unlike many investment options, you don’t get to have a “do-over” if you make a mistake in how you choose to take your pension. Your estate planning attorney may be able to give you some useful guidance in determining how your pension decision will impact your retirement.

Reference: Investopedia(July 6, 2018) “Choosing How and When to Receive Pension Benefits”

Will Your Heirs Receive What You Wanted, Or Will There Be a Family Battle?

To be certain the heirs you intend inherit the assets you intend, remember these points

One of the reasons that people do estate planning, is to make sure that their assets go to the people they want.  However, when things change, and estate plans aren’t updated, it doesn’t always work out.

MP900178564If you are like most people, most of your assets are in retirement accounts, annuities, life insurance policies and pensions, says MD Magazine in its recent article, “Making Sure Your Heirs Get What You Intend.” These accounts require that a beneficiary be named, and those assets go directly to the beneficiary on the death of the owner.

It’s not uncommon after a few years, for a person to forget which beneficiaries they specified for a life insurance policy or pension. Perhaps it’s a first spouse and they’ve now remarried. There’s no “do-over” after you’re gone, which can lead to considerable confusion and stress. It will also ultimately disappoint your intended heirs. In addition, based on whether and how some other assets are designated in estate planning documents, some states may send the matter to probate. This can be a long and expensive process, since if the estate plan was done right in the first place, it wouldn’t be needed.

To be certain the heirs you intend inherit the assets you intend, remember these points:

  • Keep track of the beneficiaries you’ve designated for your accounts. If you don’t recall, check with these institutions.
  • Don’t rely on cookie-cutter, one-size-fits-all estate planning products. Get a custom plan from an experienced estate planning attorney, even though it may cost a little bit more money.
  • Regularly review the beneficiary designations on your financial accounts and those in your will, to be sure they’re in sync and current.

Some people think they are required to create a trust for estate planning, when a well-drafted will and clear beneficiary designations will suffice. Talk to your attorney to determine if a trust is a good idea for your specific situation. The primary reason in some cases to have a trust is potential incapacitation.  Therefore, a trust can empower heirs to manage your estate without first going to court to get a conservatorship, which can be time-consuming and costly.

A trust can also be way to manage your estate “from the grave.” A trustee is appointed to assure that assets are distributed according to specified instructions. This can be a good way to make sure heirs with dependency issues don’t burn through their inheritance quickly or spend it on the wrong things. Trusts can also be a smart way to ensure the care of a disabled relative.

A qualified estate planning attorney will help you create an estate plan, which should include a thorough evaluation of all of your assets and updating your beneficiary designations.

Reference: MD Magazine(July 25, 2018)“Making Sure Your Heirs Get What You Intend”

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