Avoiding The Dangers of Transfer On Death And In Trust For Accounts

It is now permissible, in the State of New York, to have beneficiaries listed on brokerage and investments accounts, regardless of whether or not they are retirement accounts.  The designation is commonly referred to as a TOD, or transfer on death, designation.  With savings, checking and money market accounts held with banks, one is also permitted to list beneficiaries, with those usually referred to as “in trust for” accounts. 

The primary advantage of having TOD or “in trust for “ designations on one’s accounts is that one avoids probate, at least with respect to these accounts.  Joint ownership of accounts accomplishes the same purpose, but is more dangerous because the intended beneficiary immediately becomes a joint owner. The monies in these accounts pass automatically to the beneficiary, usually just by presentation of a death certificate and identification that one is the beneficiary.  Bankers, investment advisors and others actively encourage customers to make these designations.  In some cases they absolutely insist on it or they scare their clients into doing so, stating that the probate process is terribly long, expensive, and must be avoided.   In fact, probate in New York is, in most cases, rather simple and not very costly.

While having beneficiary designations is advantageous, in some instances, clients must first weigh the pros and cons, rather than just following the advice of others. There can be some adverse consequences of doing so.  For example, with a married couple, having a beneficiary designation may negate the planning they have done in order to avoid estate taxes or long-term care liabilities. Naming a person under the age of 18 as a beneficiary can be disastrous, as a minor is not legally able to accept money unless there is a court-appointed guardian.  Additionally, if you have more than one child, then the beneficiary designation should list all the children, to avoid inequality and fighting.  By using beneficiary designations, you may be inadvertently disinheriting people you intend to provide for, and/or giving more to others than you desire. Lastly, if all of one’s accounts list beneficiaries and pass outside of one’s will, it will leave no money available with which to pay estate taxes and other expenses.

If one’s only goal is to avoid probate, there are ways to do so without incurring the risks associated with using beneficiary designations and joint ownership.  Establishing a revocable living trust may be a better option.  Of course, you should first obtain the advice of an attorney experienced in estate planning.

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