8 Ways to Avoid Probate
Save your family time and money
Mary Randolph, J.D.
April 2012, 9th Edition
Avoid probate and save time and money with these eight strategies
Did you know? If you plan carefully, your estate may not have to go through the process of probate. Probate can drag on for years, and can easily cost your family thousands of dollars -- money that would otherwise have gone to them.
8 Ways to Avoid Probate offers simple and effective methods for skipping the probate process so that property goes directly to the intended beneficiaries. Using the simple, plain English instructions, you'll learn how to create a savvy estate plan. Find out about:
- setting up payable-on-death accounts
- naming beneficiaries, including children, institutions, and multiple beneficiaries
- naming beneficiaries for retirement accounts, vehicles, real estate, and stocks and bonds
- special procedures for small estates
- holding property in joint ownership, and alternatives to joint ownership
- using a living trust to avoid probate
- making gifts of property and money
This edition provides updates to estate and gift tax laws, updated 50-state tables on simplified probate, and additional information on how to bequeath real estate without probate -- 12 states now offer a special deed for just this purpose.
“…complete details for each state…”-Los Angeles Times
“The ninth updated edition of 8 Ways to Avoid Probate provides readers with solid advice on easy methods that can skip the probate process, from naming payable-on-death beneficiaries for financial accounts and owning property jointly to creating living trusts and more. It's been completely updated to include the latest estate laws and gift tax rules, and offers a focus on the transfer-on-death deeds which are now available in more states. From personal property such as autos to home ownership and bank accounts, this covers all kinds of transfers and includes case history examples throughout in a recommendation for any general lending library."-Midwest Book Review
Mary Randolph earned her law degree from the Boalt Hall School of Law at the University of California, Berkeley. She is the author of The Executor's Guide: Settling Your Loved One's Estate or Trust, 8 Ways to Avoid Probate, Every Dog's Legal Guide: A Must-Have Book for Your Owner, and Deeds for California Real Estate. She is also a coauthor of the legal manual for Quicken WillMaker Plus. She has been a guest on The Today Show and has been interviewed by many publications, including the Wall Street Journal, the Los Angeles Times, the San Francisco Chronicle, and more. She lives in the San Francisco Bay Area with her family. Connect with Mary on Google+
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Introduction: Thinking About Probate Avoidance
- Is It Worth Your While to Avoid Probate?
- What Probate Avoidance Can’t Change
- Comparing Probate-Avoidance Methods
- A Lick of Common Sense
1. Set Up Payable-on-Death Accounts
- The Paperwork
- Adding a P.O.D. Designation to a Joint Account
- Choosing Beneficiaries
- If a Beneficiary Dies Before You Do
- If You Change Your Mind
- Claiming the Money
2. Name a Beneficiary for Your Retirement Accounts
- Choosing a Beneficiary
- Required Distributions From Retirement Accounts
3. Name a Beneficiary for Stocks and Bonds
- Transfer-on-Death Registration
- Registration of Government Bonds and Notes
4. Name a Beneficiary for Your Vehicles
- Transfer-on-Death Registration
- Joint Ownership With the Right of Survivorship
- Special Transfer Procedures for Vehicles
5. Name a Beneficiary for Your Real Estate
- Can You Use a T.O.D. Deed?
- How It Works: An Overview
- Possible Drawbacks of T.O.D. Deeds
- How to Prepare, Sign, and Record the Deed
- Three Ways to Cancel the Deed -- And One Way Not To
- How the New Owner Claims the Property
6. Hold Property in Joint Ownership
- Kinds of Joint Ownership That Avoid Probate
- Joint Tenancy
- Tenancy by the Entirety
- Community Property
- Alternatives to Joint Ownership
7. Create a Living Trust
- How a Living Trust Avoids Probate
- Other Advantages of a Living Trust
- Why You Still Need a Will
- Do You Really Need a Living Trust?
- Creating a Valid Living Trust
- What Property to Put in a Trust
- Taxes and Recordkeeping
- Amending or Revoking a Living Trust Document
8. Take Advantage of Special Procedures for Small Estates
- Why Even Large Estates May Qualify
- Claiming Wages With an Affidavit
- Claiming Other Property With Affidavits
- Simplified Court Procedures
9. Make Gifts
- The Federal Gift Tax
- Making Tax-Free Gifts
- Gifts That Could Land You in Tax Trouble
- What to Give
- Gifts to Children
- Thinking Before You Give
10. Putting It All Together
- Alice and Frank: A Simple Life
- Maria: Dealing With Widowhood
- Mike: Midlife Concerns
- Jim and Terry: An Unmarried Couple
- Esther and Mark: New Love, Old Money
- Linda and Tomas: Comfortable
Appendix: State Information
Set Up Payable-on-Death
The Paperwork............................................................................ 17
Adding a P.O.D. Designation to a Joint Account......................... 19
Accounts With a Right of Survivorship.................................... 19
Accounts With No Right of Survivorship................................. 20
Choosing Beneficiaries................................................................ 21
Multiple Beneficiaries............................................................... 25
Institutions ............................................................................... 27
Your Spouse’s Rights............................................................... 27
If a Beneficiary Dies Before You Do........................................... 30
If You Change Your Mind............................................................ 32
How to Change a P.O.D. Designation..................................... 32
Contradictory Will Provisions................................................... 33
Property Settlement Agreements at Divorce.......................... 34
Claiming the Money..................................................................... 34
Payable-on-death bank accounts offer one of the easiest ways to keep money—even large sums of it—out of probate. All you need to do is properly notify your bank of whom you want to inherit the money in the account or certificate of deposit. The bank and the beneficiary you name will do the rest, bypassing probate court entirely. It’s that simple.
This kind of account has been called the “poor man’s trust.” The description is apt (if sexist) because a payable-on-death account does accomplish for a bank account—for free—exactly the same result as would an expensive, lawyer-drawn trust.
As long as you are alive, the person you named to inherit the money in a payable-on-death (P.O.D.) account has no rights to it. If you need the money, or just change your mind about leaving it to the beneficiary you named, you can spend the money, name a different beneficiary, or close the account.
Payable-on-Death Accounts at a Glance
• They’re easy to create.
• There’s no limit on how much money you can leave this way.
• Designating a beneficiary for a bank account costs nothing.
• It’s easy for the beneficiary to claim the money after the original owner dies.
• You can’t name an alternate beneficiary.
Payable-on-Death Account or “Totten Trust”?
Payable-on-death accounts go by different names in different states—and sometimes in the same state. Your bank, for example, may respond to your request for a payable-on-death account by handing you a form that authorizes the creation of something called a “Totten trust.” Payable-on-death bank accounts are also sometimes called tentative trusts, informal trusts, or revocable bank account trusts.
“Totten trusts” are really just payable-on-death accounts. The name comes from an old New York case (Re Totten), which was the first case to rule (in 1904) that someone could open a bank account as “trustee” for another person who had no rights to the money until the depositor died. Other courts had balked at this, objecting that such an account was tantamount to a will, which had to fulfill detailed legal requirements to be valid. The Totten court called the account a “tentative” (revocable) trust.
After this decision, courts in many other states adopted the idea of Totten trusts. Later, state legislatures enacted statutes authorizing payable-on-death accounts, specifically addressing many of the questions that had sprung up about Totten trusts. For example, some statutes state exactly how you can change a payable-on-death designation.
Banks, savings and loans, and credit unions all offer payable-on-death accounts. They don’t charge any extra fees for keeping your money this way. You can add a payable-on-death designation to any kind of new or existing account: checking, savings, or certificate of deposit.
Setting up a payable-on-death bank account is simple. When you open the account and fill out the bank’s forms, just list the beneficiary on the signature card. The bank may also ask you for some other information, such as the beneficiary’s address and birth date. (For example, the current address of each beneficiary is required by law in a few states.) The beneficiary of a payable-on-death account, who is commonly referred to as a “P.O.D. payee,” doesn’t have to sign anything.
Example: Magda wants to leave her two nieces some money. She opens a savings account at a local bank, deposits $10,000 in it, and names her two nieces as payable-on-death beneficiaries. After Magda’s death ten years later, they claim the money in the account—including the interest paid by the bank—without going through probate.
If you choose an account that has restrictions on withdrawals—for example, a 24-month certificate of deposit—the early withdrawal penalty will probably be waived if you die before the period is up.
If you’ve considered changing a solely owned bank account to a joint account with the person you want to inherit the money after your death, you may be better off by simply naming the person as the P.O.D. beneficiary instead. There are several advantages.
If you added another person’s name to yours on the account, he or she would immediately have the right to withdraw money from the account. And if she got behind on her debts, a creditor could come after her share of the account. (See Chapter 6.)
Example: Matthew, an elderly widower, goes down to his bank and makes his daughter, Doris, the payable-on-death beneficiary of his checking account. Doris (and her creditors) will have no access to the money during Matthew’s life, but after his death she’ll be able to get the funds in the account quickly and easily.
Don’t create a joint account just to avoid probate. If you want to leave money to someone at your death—but not give it away now—stick to a P.O.D. account. It will accomplish your goal simply and easily. Don’t set up a joint account with the understanding that the other person will withdraw money only after you die. This is a common mistake, and it often creates confusion and family fights.
Adding a P.O.D. Designation to a Joint Account
P.O.D. accounts can be very useful for couples who have joint bank accounts.
Accounts With a Right of Survivorship
Most joint accounts come with what’s called the “right of survivorship,” meaning that when one co-owner dies, the other will automatically be the sole owner of the account. So when the first owner dies, the funds in the account belong to the survivor—without probate. If you add a P.O.D. designation, it takes effect only when the second owner dies. Then, whatever is in the account goes to the P.O.D. beneficiary you named.
Example: Virginia and Percy keep a joint checking account with several thousand dollars in it. They hold this account as joint tenants with right of survivorship. They decide to name their sons, who are both adults, as P.O.D. beneficiaries. After both Virginia and Percy have died, the bank will release whatever is left in the account to the sons, in equal shares.
It’s important for both spouses (or other co-owners) to realize that designating a P.O.D. beneficiary for a joint account doesn’t lock in the surviving spouse after one spouse dies. The survivor is free to change the beneficiary or close the account, shutting out the beneficiary who was named back when both spouses were still alive.
Example: Howard and Marge name Elaine, Howard’s daughter from a previous marriage, as the P.O.D. payee of their joint savings account. Howard dies first, and in the years that follow relations between Marge and Elaine deteriorate. Marge decides to remove Elaine as P.O.D. beneficiary and instead name her nephew, Max. When Marge dies, Elaine doesn’t inherit any of the money in the account—even though she’s firmly convinced that her father intended her to.
Adding a P.O.D. beneficiary to a joint account not only avoids probate, but allows you to plan for the unlikely event that both persons die simultaneously.
Example: June and Horace have a joint savings account. They name their daughter, Virginia, as the payable-on-death beneficiary. When June and Horace are killed in an accident, Virginia inherits the money in the account without probate.
Accounts With No Right of Survivorship
Some kinds of joint accounts cannot be turned into payable-on-death accounts. Unless your joint account provides that when one owner dies, the other automatically becomes the sole owner, don’t try to name a P.O.D. payee for the account.
Two common situations where this advice applies are:
• Your state law requires you to request the right of survivorship in writing when you open the account, and you didn’t make the proper request. In that case, the account is not a joint tenancy account; it’s what is known as a “tenancy in common” account, which means that you can leave your share to anyone you choose.
• You and your spouse live in a community property state and own a community property account together. Such accounts don’t carry the right of survivorship; each spouse has the right to leave his or her half-interest to someone else.
Don’t use a P.O.D. designation for a joint account that doesn’t have the right of survivorship. In other words, don’t try to arrange things so that a P.O.D. payee inherits just your share of a co-owned bank account at your death. It’s far more reliable and less confusing to establish a separate account and name a P.O.D. payee for it.
There are few restrictions on whom you can name as a P.O.D. beneficiary. But there are some issues you should think about as you make your choices.
Extra FDIC Coverage for Beneficiaries
Payable-on-death accounts get extra coverage from the Federal Deposit Insurance Corporation.
The general rule is that the FDIC insures each person’s accounts at a financial institution up to $250,000. But to calculate the amount of FDIC insurance coverage on an account with P.O.D. beneficiaries, you multiply the number of beneficiaries by $250,000.
For example, if you have an account and name your son as the P.O.D. beneficiary, your insurance coverage is $250,000, just as it would be if you had no P.O.D. beneficiary. But if you name your son and your daughter as P.O.D. beneficiaries, the account is immediately insured up to 2 × $250,000, or $500,000.
To check on FDIC coverage for your accounts, use the “Electronic Deposit Insurance Estimator” at www.fdic.gov.
It’s perfectly fine to name a minor—that is, a child younger than 18 years old—as a P.O.D. payee. If the account is worth more than a few thousand dollars, however, you should think about what might happen if that beneficiary were still a child at your death. You will probably want to arrange for an adult to manage the money for the child.
If you don’t, and a minor child inherits money from a payable-on-death account, one of three things will happen:
• If state law allows it, the money, no matter how much, can simply be given to the beneficiary’s parents (or to the beneficiary, if he or she is married). The parents hold the money for the benefit of the child.
• If the amount is relatively small—generally, a few thousand dollars, depending on state law and bank custom—the bank will probably turn it over to the child or the child’s parents.
• If the amount is larger, the parents will probably have to go to court and ask to be appointed guardians of the money. (If the parents aren’t alive, a guardian will probably already have been appointed and supervised by the court.)
Fortunately, court involvement, which can be expensive, intrusive, and time-consuming, can be easily avoided. You can choose someone now, and give that person authority to manage the money, without court supervision, in case the child is still younger than 18 at your death. The logical choice, usually, is one of the child’s parents.
The easiest way to do this, in most states, is to name an adult to serve as “custodian” of the money. Custodians are authorized under a law called the Uniform Transfers to Minors Act (UTMA), which has been adopted by every state except South Carolina and Vermont.
All you need to do is name the custodian as the P.O.D. payee of the account and make it clear that the custodian is to act on the child’s behalf. That gives the custodian the legal responsibility to manage and use the money for the benefit of the child. Then, when the child reaches adulthood, the custodian turns over what’s left to the beneficiary. Most, but not all, UTMA states set 21 as the age when the custodianship ends. (The ages are listed below.)
Example: Alice wants to make her grandson, Tyler, the P.O.D. payee of a bank account. But Tyler is just nine years old. So Alice decides to name Tyler’s mother, Susan, as custodian of the money in the account. On the bank’s form, Alice puts, in the space for the P.O.D. payee, “Susan Irving, as custodian for Tyler Irving under the Florida Uniform Transfers to Minors Act.” If Tyler is not yet 21 when his grandmother dies, Susan will be legally in charge of the money until Tyler’s 21st birthday.
Age at Which an UTMA Custodianship Ends
Alaska 18 to 25*
Arkansas 18 to 21*
Nevada 18 to 25*
California 18 to 25*
New Hampshire 21
New Jersey 18 to 21*
New Mexico 21
New York 21
District of Columbia 18 to 21*
North Carolina 18 to 21*
North Dakota 21
Oklahoma 18 to 21*
Oregon 21 to 25*
Pennsylvania 21 to 25*
Rhode Island 21
South Dakota 18
Tennessee 21 to 25*
Maine 18 to 21*
Virginia 18 to 21*
Washington 21 or 25*
West Virginia 21
Michigan 18 to 21*
*The person who sets up the custodianship can designate the age, within these limits, at which the custodianship ends and the beneficiary inherits the money outright.
If You Don’t Live in an UTMA State
Even if you live in South Carolina or Vermont—the only states that haven’t adopted the UTMA—you may still be able to enjoy the law’s benefits. The law is written so that you can appoint a custodian if any of the following is true:
• The custodian lives in a state that has adopted the law.
• The minor lives in a state that has adopted the law.
• The bank account (the “custodial property,” in the terms of the statute) is located in a state that has adopted the law.
Example 1: Christopher is a resident of South Carolina. His grandson, however, lives in California, which has adopted the UTMA. Christopher can appoint a custodian for his grandson under the California Uniform Transfers to Minors Act. As long as the boy is a resident of California when the transfer takes place, the transfer is valid under the UTMA.
Example 2: Eunice, a Vermonter, keeps an account in a New Hampshire bank. She can use the New Hampshire UTMA to appoint a custodian for her granddaughter. On the bank forms, she can name “Esther Stanhope, as custodian for Michelle Stanhope under the New Hampshire Uniform Transfers to Minors Act.”
You may well want to name more than one person to inherit the money in a bank account—for example, your three children or two good friends. That’s no problem; you just name all the beneficiaries on the bank’s form. Each will inherit an equal share of the money in the account unless you specify otherwise.
Be careful when setting up unequal shares. In a few states—Florida, for example—you cannot change the equal-shares rule. If you’re concerned about this issue, check your state’s law or open a separate account for each beneficiary.
It’s important to realize that you can’t name an alternate payee—that is, someone to inherit the money if your first choice doesn’t outlive you. In other words, if you list three payees on a bank’s form, the bank won’t consider your list to be a ranking in order of preference. For example, some bank forms provide three spaces for beneficiaries’ names. It’s not uncommon for people to assume that beneficiary #1 will get all the money, and that if he isn’t alive at your death, then #2 will inherit it, and so on. But that’s not the way it works. All the beneficiaries you name will share the money in the account.
If one of the beneficiaries dies before you do, all the money will go to the surviving beneficiaries. So if you leave an account to your three children, and one of them dies before you do, the other two will inherit the funds. Depending on your family situation, this result may be fine with you—or it may not. If it’s not what you want, you should name new P.O.D. payees after a beneficiary dies.
Example: Miranda names her sons, Brad and Eric, as P.O.D. beneficiaries of her bank account. Eric dies before Miranda does, leaving two children of his own. Unless Miranda changes her bank account papers to include the grandchildren as P.O.D. beneficiaries, they will not inherit their father’s share. Instead, all the money in the account will belong to Brad when Miranda dies.
Also give some thought to the kind of asset you’re leaving. Naming more than one P.O.D. beneficiary to inherit a bank account isn’t generally a problem, because the money can easily be divided. If you are adding a P.O.D. designation to a brokerage account, things can be more complicated. If the account owns one large asset—for example, a bond—then it will have to be sold, and the proceeds divided among all the beneficiaries. That can be done, but the sale proceeds may need to be reported to just one Social Security number, which the beneficiaries may not want. These problems can be time-consuming and costly, negating any probate-avoidance benefit.
It’s unlikely, but your state’s law may restrict your ability to name an institution, such as a school, church, or other charity, as the beneficiary of a P.O.D. account. Delaware law, for example, requires the beneficiary to be “a natural person.” Oklahoma doesn’t allow for-profit entities such as corporations or limited liability companies to be P.O.D. beneficiaries; beneficiaries must be individuals, trusts, or tax-exempt nonprofits. (Okla. Stat. Ann. tit. 6, § 901.)
Such a requirement can frustrate attempts to leave money as you wish. For example, under previous Georgia state law, a charitable corporation could not be the P.O.D. beneficiary of a bank account or certificates of deposit. (Tuvim v. United Jewish Communities, Inc., 285 Ga. 632, 680 S.W.2d 827 (2009).) State statute, the court ruled, required P.O.D. beneficiaries to be “persons,” and the definition of a person did not include corporations. Georgia amended its law in 2011 to allow charities to be beneficiaries.
Your Spouse’s Rights
You may not have complete freedom to dispose of the funds in a bank account—even if it’s in your name—as you wish. Your spouse or partner (if you’ve entered into a registered domestic partnership or civil union) may have rights, too. It depends on your state’s law.
Community Property States
All other states
*Only if spouses sign a community property agreement.
You can’t shortchange creditors or family. If you don’t leave enough other assets to pay your debts and taxes or to support your spouse and minor children temporarily, a P.O.D. bank account may be subject to the claims of creditors or your family after your death. If there is any probate proceeding, your executor can demand that a P.O.D. beneficiary turn over some or all of the funds so that creditors can be paid.
If you specifically pledged the account as collateral for a debt, the creditor is entitled to (and doubtless will) claim repayment directly from the funds in the account. The P.O.D. payee gets whatever, if anything, is left.
Spouses’ Rights in Community Property States
If you live in a community property state, your spouse (or your registered domestic partner) probably already owns half of whatever you have in a bank account, even if the account is in your name only. If you contributed money you earned while married, that money and the interest earned on it is “community property,” and your spouse is legally entitled to half.
There are a few exceptions to this rule: Your money is yours to do with as you please if you and your spouse have signed a valid agreement to keep all your property separate. And your spouse does not have any right to your separate property—money you deposited before you were married, or money that you alone inherited or received as a gift—unless that money has been mixed with community property in a bank account and is impossible to separate.
If the money in your account is community property, and you want to name someone other than your spouse as the P.O.D. beneficiary for the whole account, it’s a good idea to get your spouse’s written consent. Otherwise, your spouse could assert a claim to half of the money in the account at your death, leaving the beneficiary you named with only half.
Spouses’ Rights in Non-Community Property States
If you leave money in a P.O.D. bank account to someone other than your spouse, make sure your spouse doesn’t object to your overall estate plan.
In almost all non-community property states (all states except the ones listed above), surviving spouses who are unhappy with what the deceased spouse left them can claim a certain percentage of the deceased spouse’s property. This is called the spouse’s “elective share” or “statutory share,” and in most states it amounts to about a third of what the spouse owned. It’s a fairly rare occurrence, however, for a spouse to go to court over this, because most spouses inherit more than their statutory share.
The funds in a P.O.D. account may be subject to a spouse’s claim—
or they may not, depending on state law. Some states consider such accounts outside the surviving spouse’s reach.
It’s an infrequent practice these days, but some couples make legally binding agreements to leave property to each other. They sign a contract that requires them in turn to sign wills leaving all their assets (or part of them) to each other. These contracts have been ruled to take precedence over a payable-on-death designation on a bank account. In other words, the P.O.D. designation gets wiped out by the contract.
Example: Scott and Terry sign a contract in which each promises to make a will leaving all their assets to the other. Later, Scott adds a payable-on-death designation to his savings account, naming his brother as the beneficiary. If Scott dies first, Terry has a legal right to the funds in the account.
If a Beneficiary Dies Before You Do
People usually choose people younger than themselves to inherit their money and property, fully expecting them to outlive their elders. But sometimes this natural course of events is disrupted. If someone you have named as a P.O.D. beneficiary dies before you do, you should change the necessary paperwork at the bank to put a new beneficiary in place.
If you named more than one payee, and one or more of them dies before you do, the funds in the account will go to the survivor(s) at your death. (See “Choosing Beneficiaries,” above.)
If, however, none of the P.O.D. payees you named is alive at your death, the bank will release the funds in the account to your executor, who will be responsible for seeing that the money is distributed under the terms of your will or state law. The money will probably have to go through probate, unless your estate is small enough to qualify for special, simpler procedures. (Chapter 8 discusses these probate shortcuts.)
If you want to name alternate beneficiaries, don’t rely on a P.O.D. account. Banks generally don’t allow you to name an alternate P.O.D. payee—that is, someone who would inherit the money if none of your primary beneficiaries outlived you.
Your will, if you make one (and you should, for reasons like this) functions as a backup in this case, as explained below. But that doesn’t avoid probate. If you want to name a back-up beneficiary and be sure of avoiding probate, you’ll probably want to use a living trust. (See Chapter 7.)
Depending on state law, however, the bank may be able to release the money directly to your legal heirs—the close relatives who are entitled to inherit from you if you don’t leave a will. In that case, the money won’t have to go through probate.
If the money goes to your executor, it will be distributed under the terms of your will, even though you most likely didn’t even mention this account in your will. That’s because most wills contain what is called a “residuary clause,” which names a beneficiary to inherit everything that’s not specifically mentioned in the will. The person you named to inherit this “residuary” property would receive this money.
Example: Mark names his brother as the P.O.D. beneficiary of his savings account. But his brother dies, and Mark, confined to a nursing home, isn’t able to change the paperwork at the bank to name a new payee. Mark does, however, have a will that contains a residuary clause, naming his daughter Madeline as residuary beneficiary. When Mark dies, and the will is probated, the money in the account goes to her, along with everything else that Mark didn’t specifically leave to another beneficiary.
If You Change Your Mind
Families change; relationships change. At some point you may decide that you don’t want to leave money to a P.O.D. payee you’ve named, or a beneficiary may die before you do. You’re free to change the P.O.D. arrangement, but you must meticulously follow the procedures for making changes. The law books, sadly, are full of cases brought by relatives fighting over the bank accounts of their deceased loved ones who didn’t pay enough attention to these simple rules.
How to Change a P.O.D. Designation
There are two easy and foolproof ways to make a change to a P.O.D. account:
• Withdraw the money in the account, or
• Go to the bank and change the paperwork. Fill out, sign, and deliver to the bank a new account registration card that names a different beneficiary or removes the P.O.D. designation altogether.
To ensure that your wishes are followed after your death, dot the i’s and cross the t’s when it comes to following the bank’s procedures. A change in beneficiary isn’t effective unless you fulfill the bank’s requirements, whatever they are. Almost all banks require something in writing—a phone call isn’t good enough. And to be effective, in most places your written instructions must be received by the bank before your death.
That doesn’t sound difficult, but it’s not all that unusual to find problems. In one case, after a woman’s death a new signature card, in a stamped envelope, was found on her desk. Relatives sued over the money. The court ruled that the change was not effective because the new signature card was ambiguous and because the bank had not received it before her death. (Codispoti v. Mid-America Federal Savings and Loan Ass’n, No. 85AP-451, Ohio App. (1986).)
Contradictory Will Provisions
Trying to change a P.O.D. designation in your will by leaving the account to someone else is almost certain to cause problems after your death. At best, it will spawn confusion; at worst, disagreements or even a lawsuit.
About half the states say, flat out, that a P.O.D. designation cannot be overridden or changed in a will. In these states, a will provision that purports to name a new beneficiary for a P.O.D. account will simply have no effect.
Example: Kimberly names her niece, Patricia, as the P.O.D. beneficiary of her bank account. After they have a falling-out, Kimberly writes her will, and in it leaves the funds in the account to her friend Charles. At Kimberly’s death, Patricia is still legally entitled to collect the money.
Some other states do allow you to revoke a payable-on-death designation in your will if you specifically identify the account and the beneficiary. An attempt to wipe out several accounts with a general statement won’t work. In one case, a South Dakota woman wrote in her will that “I hereby intentionally revoke any joint tenancies or trust arrangements commonly called ‘Totten trusts’ [another name for P.O.D. accounts] by this will.” After her death, a court ruled that even this language wasn’t specific enough; state law requires every P.O.D. account to be individually changed or revoked. (In re Estate of Sneed, 521 N.W.2d 675 (S. Dak. 1994).)
The moral: Never rely on your will to change a payable-on-death account. Instead, deal directly with the bank, which, after all, will be in charge of the money after your death.
Property Settlement Agreements at Divorce
A property settlement agreement, even though it’s approved by a court when a couple divorces, may not revoke a payable-on-death designation.
For example, when a New York couple divorced, the property settlement agreement gave the husband “any and all bank accounts, held jointly or otherwise.” Some of those accounts named the wife as payable-on-death beneficiary; when the husband died, she inherited the money. The court ruled that because the settlement agreement had not named the accounts specifically, it had not met New York’s statutory requirements for the revocation of a Totten trust account. (Eredics v. Chase Manhattan Bank, N.A., 760 N.Y.S.2d 737 (Ct. App. 2003).)
Similarly, when an Arizona couple divorced, their property settlement agreement gave the husband some bank CDs for which he had named the wife as the payable-on-death payee. But the husband never went to the bank and removed the wife as the P.O.D. payee. When he died, a court ruled that the ex-wife was entitled to the money, because the settlement agreement had no effect on the contract between the husband and the bank. (Jordan v. Burgbacher, 883 P.2d 458 (Ariz. Ct. App. 1994).)
Claiming the Money
After your death, all a P.O.D. beneficiary needs to do to claim the money is show the bank a certified copy of the death certificate and proof of his or her identity. If the account was a joint account to begin with, the bank will need to see the death certificates of all the original owners. The bank records will show that the beneficiary is entitled to whatever money is in the account.
State laws authorize banks to release the money in payable-on-death accounts when they’re shown this proof of the account holder’s death; they don’t need probate court approval. Legally, the money automatically belongs to the beneficiaries when the original account owner dies. It’s not part of the probate estate and isn’t under the executor’s control.
Beneficiaries may, however, encounter some delays when they go to claim the money:
• Tax clearances. Like other bank accounts, a payable-on-death account may be temporarily frozen at your death, if your state levies estate taxes. The bank will release the money to your beneficiaries when the state is satisfied that your estate has ample funds to pay the taxes.
• Waiting periods. There may be a short waiting period before the money can be claimed. Vermont, for example, doesn’t allow a bank to release funds to P.O.D. beneficiaries until 90 days after the death of the account owner.
When you set up a P.O.D. account, ask the bank what the P.O.D. payee will need to do to claim the money after your death. Then make sure the payee knows what to expect.