Written by Arizona Elder Law Attorney Scott Jensen
This is a common discussion point that I regularly have with clients when they are making a decision about ways to avoid probate. They will name a person as the recipient of a Payable on Death (POD) or a Transfer on Death (TOD) on an individual account. The effect of naming a person as a POD or TOD is the account transfers to a designated person by operation of law rather than by will or intestate succession when the owner dies. When an account is governed by a will, the financial institution may require either a small estate affidavit to transfer title of the account to a beneficiary or probate may be required to appoint a personal representative of the estate to transfer title.
Probate can be a lengthy and cumbersome process to transfer assets after a person passes away. For certain situations the POD and TOD are a very efficient and effective way to avoid probate and transfer an account to a beneficiary after death. This works best when there is generally one beneficiary on an account, who is also financially responsible and hopefully not in a situation where creditors are afoot.
Complications can arise when then the beneficiaries are more than one, not financially responsible or where there are creditors actively seeking to collect money from the named POD or TOD.
First, when there are multiple beneficiaries, many financial institutions will not release funds unless all beneficiaries are willing to sign the distribution agreement. If one beneficiary disagrees and refuses to sign, then no funds will be distributed to anyone. In order to distribute funds, court involvement might be required in order to compel the division and distribution of the funds. This situation can arise when you have 2 children who do not get along named as TOD on an account and one child does not need the distribution and refuses to sign. The contesting child could hold up the distribution to the other child and in effect prohibit that beneficiary from receiving their share no matter how badly the non-contesting child might want or need the funds.
Second, when there is a TOD in place, the financial institution will distribute the funds directly to the named person, outright and free of any restrictions. For a child or person that is not financially responsible this could be problematic. They may use the money in a manner other than what the decedent intended. For example, a person may want an account to go to a child for tuition to college. Under a TOD, the child has no legal obligation to use the money to go to college but could use the money for new car, trip to Las Vegas, or other undesirable uses from the decedent’s point of view.
Third, when a person named as a TOD receives the distribution, it comes directly to the named TOD. If there are creditors of the beneficiary or if they are going through a bankruptcy, this distribution is subject to their creditor claims.
A cleaner more effective way to transfer accounts upon death is to use a revocable trust. By using a trust, a person is able to transfer trust assets to a loved one after death with out being required to go through probate. The trustee of the trust can also gain control of the accounts without the permission of numerous beneficiaries. Additionally, when dealing with creditors and worrying how a beneficiary will use the money, trusts can be set up to protect loved ones from mismanaging the money. Finally, trusts can be set up to protect assets from a beneficiary’s creditors, thereby preserving the decedent’s legacy.