Transfer on death or payable on death accounts make people question whether they should create revocable trusts. TOD and POD accounts avoid the probate process after someone dies. New York allows a person to register stocks and bonds in a TOD account. There are pros and cons to using TOD accounts and revocable trusts.
TOD accounts vs. POD accounts
A TOD account allows a person to name the beneficiary for a non-retirement financial account that receives assets after the owner’s death. When used correctly, TOD or POD accounts avoid the probate process like revocable trusts. A TOD account covers the distribution of stocks, bonds and brokerage accounts. A POD account covers the distribution of bank assets such as cash instead of securities. Both can avoid the public, expensive and slow probate process. Financial institutes don’t always have TOD or POD accounts available. Most major brokerage and investment houses have TOD and POD accounts available.
Pros and cons of POD and TOD accounts
A pro of TOD and POD accounts is avoiding the probate process by naming beneficiaries to receive assets after the owner dies. POD and TOD accounts distribute assets quickly to the intended beneficiaries. There are cons to using TOD and POD accounts. When there are debts on the decedent’s estate, the person responsible for the estate seeks contributions from the TOD and POD beneficiaries. They may file a lawsuit if the beneficiaries don’t voluntarily contribute to the debts. The beneficiaries may spend the assets or have other legal matters like divorce.
Extra protections of revocable trusts
A revocable trust allows you to plan for incapacity. The owner can select a successor or co-trustee to take over the administration. The owner of a TOD account needs a power of attorney to transfer ownership powers. Most financial institutions are reluctant to accept powers of attorney for several reasons. Trusts allow a person to plan for their beneficiaries. Revocable trusts can protect minor beneficiaries and ones with special needs, substance abuse, mental health. The owner can spread inheritance out over a period with revocable trusts.
POD and TOD accounts are appropriate for avoiding the probate process, but they have their limitations for more complex estates. Revocable trusts can be used to pay debts, expenses and taxes before distributing assets to beneficiaries. Depending on the circumstances, TOD accounts and revocable trusts have their place for avoiding the probate process.