Beware Direct Transfer Designations (TODs and PODs)- Part IV: TOD's in Trust Planning

This Blog has addressed in several previous articles the dangers of direct transfer designations such as transfers on death (TOD's) and payable on death (POD's) designations:

• Beware Direct Transfer Designations (TODs and PODs);
• Aging in Place Planning Heightens Necessity of Trust Funding;
• Beware Direct Transfer Designations (TODs and PODs)- Part II: Ohio Transfer of Death Designation Affidavit (TODDA) for Real Estate- Lapse of Insurance Coverage;
• Beware Direct Transfer Designations (TODs and PODs)- Part III- Transfer on Death Deed for Real Estate Results in Loss of Insurance Coverage and Impairment of Asset Value.

These articles recount why immediate transfers on the death of an owner mean risk, especially in an estate plan with an "aging in place" objective.  Regardless, these devices remain popular as inexpensive means to avoid probate and death, and are often seen as an alternative to a trust. 

Unfortunately, they are also frequently used in conjunction with trust planning.  A few years ago, when reviewing a trust for a client, the client explained that her attorney prepared a transfer on death deed for her real estate rather than a deed conveying the real property to her trust.  When asked whether the attorney explained this peculiar choice, the client stated that she received no explanation.  

I recently reviewed another estate plan incorporating a trust, and again discovered the drafting attorney utilized a transfer on death deed, or more accurately, a Transfer on Death Desgnation Affidavit (TODDA) as they are now called in Ohio.  I was surprised that two different clients, with two different lawyers, located in separate parts of the state had designed an estate plan around a trust with what I consider such a peculiar choice for handling the real property.  I searched an estate planning listserv, an electronic bulletin board where attorneys share information, and learned that there is a group of estate planning lawyers that employ transfers on death for real estate and other assets when utilizing a trust because it "retains ownership of the property in the individual name of the client."  

This is "peculiar" because the bedrock of trust planning is changing "ownership" of assets in favor of "deliberate" planning and administration.  In other words, trust lawyers recognize that owning assets in the name of an individual, or jointly in the names of more than one individual, means automatic, forced, and vested rights which often create disadvantages such as the necessity of probate. The disadvantages of individual ownership of property and assets are precisely why trusts exist.  Trusts, by intent and design, typically avoid the automatic transfer of property at the arbitrary moment of death, whether or not that transfer involves probate, by appointing a trustee, a person with a mind and heart, and authority to avoid the disadvantages of mindless and heartless immediate transfer of assets.  

Simply, the automatic transfer of ownership of property on any arbitrary date, such as the date of the owner's death, is fraught with risk and foreseeable risk of loss.  A beneficiary may:

• die with, shortly before, or shortly after the owner, resulting in probate of the assets in the estate of the beneficiary (and not incidentally, a different possible ultimate distribution of the deceased's estate- many parents prefer their estate to pass to their grandchildren rather than a daughter or son-in-law, for example);
• be disabled or incompetent to manage property, or may become so shortly before or after the owner's death;
• be a recipient of means-tested government benefits, and may, as a result of asset ownership  lose necessary government benefits or assistance;
• suffer from impairment risking loss of the assets, such a mental illness, substance addiction, non-substance addiction (gambling), or the like;
• have pledged assets to third parties such as cults or quasi-religious organizations;
• have unavoidable judgment liens, restitution orders, creditors, receivers, or trustees in bankruptcy waiting to collect the inheritance for distribution to third parties.

These examples only scratch the surface of a deep well of possible, foreseeable circumstances that may result in the loss of inheritance to third parties, and/or that may compromise the safety net protecting a beneficiary intended by a deceased. 

These risks are often unavoidable when assets pass automatically and arbitrarily on a specific date, rather than through a  process of evaluation, consideration, and deliberation. Trusts, generally, more capably permit a trustee to maneuver through these circumstances protecting the assets for the benefit of the intended beneficiaries, while disarming third parties from making claims.  

Aging in Place Planning Heightens Necessity of Trust Funding

Traditionally, the creation and funding of a trust to provide for your loved ones upon your passing was motivated primarily by a desire to avoid probate and make the administration easier and private.  With the advent of Aging in Place Planning, and Guardianship Avoidance and Protection, two modern goals that focus on protecting YOU during YOUR life, trust funding becomes even more important.  

Funding a trust is often described as the process of transferring ownership of your assets from your individual name to your trust. Having your assets owned by the trust provides you many different benefits directly related to the type of trust created, ranging from asset protection, tax avoidance or minimization, and/or probate avoidance. To ensure that you receive the full benefit of your trust, you  physically change the titles from your individual name (or joint names if marries or domestic partners) to the name of your trust. A trust can only control the assets that the trust (trustee) owns.

You may have a well-designed and well-written trust document, but until you fund the trust, it doesn’t control anything. Unlike a will, you aren’t finished with a trust simply by signing the document; you must, with rare exceptions, fund your trust while you are alive, able and of sound mind.

With probate avoidance trusts, so long as title of property is not in an individual name, and non-trust assets avoid probate through direct transfer designations (beneficiary, transfer on death, and payable on death designations), the objective is attained.  With trusts designed to capture additional benefits during your lifetime, however, merely avoiding probate is not sufficient; trust funding must also ensure control and management of the asset during your life.  Even in a simple probate-avoidance trust, the trust-funding strategy should include changing the beneficiary designations of your life insurance policies, annuities,  retirement accounts, and other investment accounts, to insure your trust so proceeds will go into your trust upon your demise.  The limitations and disadvantages of direct transfer designations make them ill-suited to achieve lifetime planning objectives such as aging in place or guardianship planning.   

In a lifetime planning trust such as one incorporating aging in place planning, trust control during you lifetime is paramount.  An illustration will help understand the distinction and it's importance.  Mary Baker has a non-qualified annuity on her life in the amount of $250,000 as part of her estate, and seeks to avoid probate, but also to avoid guardianship and a guardian's control of her assets, and age in place.  Following her financial planner's advice she changes the beneficiary of the annuity to her trust.  Although her attorney provided her with direction to change the ownership of non-qualified annuities to her trust, and forms to accomplish this change, she is comforted by the ease of a simple beneficiary change handled by her agent.  Although she has effectively avoided probate the annuity remains in her individual name.  A court-appointed guardian will quickly control the annuity, and may use it to whatever legal purpose the guardian articulates, including paying the guardian's fees and expenses, paying agents hired by the guardian, and paying for long-term institutional care in a nursing home over the objection of Mary Baker and her family! 

If Mary Baker changes ownership of the annuity to her trust during her lifetime, a court-appointed  guardian is not automatically conferred control of the asset upon appointment;  in most states, a guardian must seek court approval to manage trust assets, and may only do so with prior approval of the appointing court.  This distinction starts to explain the strategy of guardianship protection in a properly designed and implemented trust.  At a minimum,  the asset is not automatically available as incentive to a guardian: an asset generating a percentage fee for control and management.  Moreover, your trustee can fight to protect the asset from guardian control with standing in the probate court.  Better, your trustee can manage the asset to keep it unavailable to the guardian, by, for example, transferring the asset from a revocable trust far too easily accessible to the guardian, to another form of ownership less easily accessible to the guardian.  Most importantly for aging in place planning, use of the asset for unwanted and avoidable institutional care is better controlled.  

Funding your trust is not a difficult process.  It is, nonetheless, a strategic process that will take some time and effort.  The process may differ depending upon your trust, and/or depending upon your  specific situation, circumstances, goals, and objectives. 

Your first step is to make a list of your assets, their values and where they are located. Once you have your assets listed, let the trust funding strategy begin. Remember that any assets you are electing to fund into your trust will require changing the name on each asset to the trust and/or changing the beneficiaries to the trust.

If you have signed trust documents but are not sure if you have properly funded your trust, call your lawyer!  Your lawyer can review your documents and let you know if the funding of your trust is complete.  You can also review your funding effort against a checklist.    

Beware Direct Transfer Designations (TODs and PODs)- Part III- Transfer on Death Deed for Real Estate Results in Loss of Insurance Coverage and Impairment of Asset Value

In Dawn Strope-Robinson v. State Farm Fire and Casualty, Dawn became the owner of a home owned by her deceased uncle pursuant to a transfer on death deed. Several days after her uncle’s death, her uncle’s ex-wife intentionally started the house on fire. The resulting damage was substantial.

Dawn filed a claim against her uncle's insurance company.  The fire and resulting damage occurred prior to Dawn even having the opportunity to file an affidavit confirming her father's death, and so she had not yet obtained insurance for the property in her name. 

The insurance company denied the claim related to the real property on the basis that the policy only insured the uncle as an insured, and not any subsequent owner.  Dawn sued.  

The Eighth Circuit Court ruled in favor of the insurance company on the basis that transfer to Dawn occurred immediately upon death, Dawn was not covered under her uncle’s policy and her uncle’s estate had no insurable interest in the property.

This case has a complex procedural history and Dawn made a number of equitable and statutory arguments supporting her claim for insurance under her uncle's policy, all of which were rejected by the court.  The case was also decided applying Nebraska law. 

Of course, standard policies insure, for at least a period of time, fiduciaries of the estate of a deceased insured.  The reason that these provisions did not apply in the Strope-Robinson case is that the real property was not an asset of the probate estate, and the court ruled specifically that the uncle's estate had no insurable interest in the property. In other words, the successful effort to avoid probate meant that the uncle's insurance terminated immediately upon his death. 

   

The case should give pause to the reflexive use of a transfer on death deed or beneficiary affidavit as an inexpensive estate planning tool. 

Ohio and Missouri law differs.  In Ohio, though, the holding in Strope-Robinson appears consistent with the result predicted by the Walker case previously discussed in a separate article on this blog.  For more information see:

• Beware Direct Transfer Designations (TODs and PODs)- Part II: Ohio Transfer of Death Designation Affidavit (TODDA) for Real Estate- Lapse of Insurance Coverage.

Of course, Direct Transfer Designations is also a separate subject of the first article in this series:

• Beware Direct Transfer Designations (TODs and PODs).

Thanks to Attorney Mary Vandenack for contributing commentary on the case to Steve Leimberg's Estate Planning Newsletter, which inspired this article.   

Beware Direct Transfer Designations (TODs and PODs)- Part II: Ohio Transfer of Death Designation Affidavit (TODDA) for Real Estate- Lapse of Insurance Coverage

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Ohio law allows individuals who want to avoid probate to provide for the automatic transfer of their real property to one or more named beneficiaries using a Transfer on Death Designation Affidavit (TODDA) that becomes effective upon the death of the property owner. A TODDA, when properly recorded prior to the death of the owner, permits the direct transfer of the described real estate to the designated beneficiary or beneficiaries upon the death of the owner, thus avoiding probate administration. After the owner has died, the  the transfer is memorialized by filing a death certificate and an affidavit stating the fact of the death of the owner. 

Aside from being inexpensive and easy, there are other benefits to a TODDA.  The owner of the real property can change or even revoke a TODDA at any time. The owner can sell or transfer the property and the simply TODDA no longer applies to the real property.  TODDA forms are readily available online, often without cost or expense, and appear, at first glance, to be easily completed without a lawyer and recorded with only a nominal expense. What could go wrong?  

Disadvantages of TODDAs

First, the automatic and direct transfer of assets carries some foreseeable and significant risks.  This Blog has addressed in previous articles the dangers of direct transfer designations such as transfers on death (TOD's) and payable on death (POD's) designations.  See, for example, Beware Direct Transfer Designations (TODs and PODs). A TODDA does not solve any risks, generally, of automatic and/or direct transfers of real estate.   

Second, TODDA's may risk loss of the deceased's property and casualty insurance, which ordinarily would cover the property if the property passes to beneficiaries through probate or through a trust.  This is vitally important in assessing the risk of a TODDA given that TODDA's are only used to pass interest in real estate. 

Loss of Insurance Coverage

The risk is illustrated by a recent Ohio case, Walker v. Albers Insurance Agency.  To be clear, the case did not actually involve a TODDA, but the ruling and reasoning predict what would happen if the case had involved a TODDA.  According to the court in Walker, a beneficiary of a TODDA cannot rely on the owner's property insurance, and may suffer loss of or to the property if an event, such as a fire, occurs after the death of owner before the beneficiary can secure insurance protecting the property. 

Ms. Walker inherited a partial interest in her childhood home.  She lived alone in the home for some years and was the only named person on the homeowner’s insurance policy.  Ms. Walker passed away without a will, and her sister opened a probate estate to administer Ms. Walker's estate. Ms. Walker’s interest in the house was transferred to the her heirs, other property was distributed, and the estate was closed.  Two weeks later, before anyone could take physical possession of the house, a fire burned down the house.

Ms. Walker's homeowner’s insurance policy had not yet expired, a fortunate circumstance, or so it would initially appear.  The estate made a claim under the policy.  The insurance company denied the claim, however, because neither the descendants nor the heirs qualified as an “insured” under the terms of the policy at the time the loss occurred.  An appeals court ultimately affirmed the trial court’s determination that coverage was rightfully declined.

The case is instructive regarding the risk of insurance coverage loss using a TODDA, because it analyzed carefully the iwho" is insured person under an insurance policy of a deceased owner. All policies differ, but many policies are crafted with similar language.  In the Walker case, an insured person under the policy was:

Up until the death of the insured:

• the named insured; or
• residents of the household who are relatives or certain other dependents are insured persons. 

Upon death of the named insured:

• any household member living in the premise at the time of death; or
• any person having temporary custody until a legal representative (executor/administrator) is appointed.

Once the property was in the probate process, the legal representative (executor/administrator).

In Walker, there was no dispute that the sister was a legal representative at some point in time, the question was whether she the legal representative at the time of the loss.  When the probate estate was closed, two weeks prior to the fire, she was no longer a legal representative, and insurance coverage for the property lapsed;  at the time of the loss there was no person insured under the policy.

With a TODDA, the "transfer" occurs automatically, immediately upon the death of the owner.  This automatic transfer means that, in at least some cases, the beneficiary is wholly unaware that coverage has lapsed; indeed, a beneficiary may be wholly unaware that s/he became the owner of property immediately upon the death of the owner!  With little or no time to seek replacement insurance, the beneficiary may suffer a loss substantially impairing the value of the inheritance. 

Many planners don't advise their clients regarding this risk, and certainly those folks that avail themselves of online forms are probably wholly unaware of the risk.

Simple Fixes or Just Complicating Matters?  

There is a "fix" that some attorneys employ to solve the problem of insurance lapse, and that is the use of an "additional insured" or "additional named insured" protecting the TODDA beneficiary.  An owner can name another person as an additional insured, and indeed, trustees often use these for insurance owned in trust when the insurance company will only permit a natural person as an insured on the policy.  Beware, however, a suggestion that this always solves the problem.  To be fully insured, even if an additional named insured, the insured must have an "insurable interest" at the time of the loss. 

The reality is that the seemingly easy "fix" adds just another layer of complexity to the issue. There is a common misconception that there is little or no distinction between being an additional insured and a named insured on a policy.  From a liability perspective, however, there can be a substantial difference.  Many assume that so long as they are included as an additional insured on a personal or commercial insurance policy, they enjoy the same benefits as the owner of the policy itself.  This is usually only partially true.

Insureds, Additional Insureds, and Additional Named Insureds

A "named insured" is the actual owner of the insurance policy.  A named insured is entitled to 100% of the benefits and coverage provided by the policy.  An additional insured is someone who is not the owner of the policy, but who, under certain circumstances, may be entitled to some of the benefits and a certain amount of coverage under the policy.  The named insured extends protection to the additional insured under the terms and conditions of the named insured’s policy.

It should be noted, however, that coverage provided under the additional insured endorsement is often limited to liability arising out of acts performed by or on behalf of the named insured.  This means that for an additional insured, coverage will only extend to liability caused by the named insured.  All other liability, for which the named insured may have coverage under the policy, will not be covered when it comes to the additional insured.

How does this relate to loss of coverage?  Property and casualty or homeowner's Insurance coverage usually covers two very different losses.  The first is loss of the property or damage to the property as a result of a covered event, such as a fire. The other is liability to third parties from an act or omission of the property owner. Rather than of loss caused by a fire or other covered event to the property, consider a loss caused by an injury suffered by another person on the property resulting from a dangerous condition. Rather than impairing the value of the property by damage, the "loss" is the owner's liability for the person's injuries or death. How the insurance is written becomes very important. 

Generally, additional insured status is required by an individual or entity when the policy owner has agreed to indemnify the additional insured.  A common example is the owner of real property who leases the property to a tenant.  The property owner requires that the tenant indemnify the owner from any liability caused by the tenant.  As such, the tenant most often lists the property owner as an additional insured under the tenant’s insurance policy.  If the tenant or its agents do something that creates liability to either the property owner or a tenant, the property owner will most likely be covered.  If a third party unrelated to the tenant causes damage, however, the tenant may be covered but the property owner will not be covered.  Likewise, if the property owner does something to create liability which is covered for the tenant under the tenant’s policy, the property owner will not be entitled to coverage under the additional insured endorsement.

Furthermore, coverage extended to the additional insured may be limited and/or shared by the coverage granted to the named insured.  Thus, if a situation arises which creates liability for both the named insured and the additional insured, coverage under the policy is shared between the named insured and additional insured.  For example, if the named insured has $100,000 in liability coverage, the additional insured will likewise have $100,000 in coverage.  As such, if either the named insured or the additional insured create a liability, there will be $100,000 available to cover that liability.  If both the named insured and the additional insured incur liability, they will be required to share the $100,000 total coverage.  Therefore, a situation can easily arise when dual liability results in a shortfall of coverage.

By contrast, an additional named insured enjoys all of the benefits that the actual policy owner enjoys.  In the examples illustrated above, an additional named insured will be covered from liability created by the tenant and/or the tenant’s agents as well as liability created by the additional named insured itself.  Likewise, if there is $100,000 in coverage for the original named insured, there will be a separate and distinct $100,000 in coverage for the additional named insured.

Regardless, an additional named insured does not always have the privileges and/or obligations of the original named insured (e.g., the obligation to pay premiums or the right to cancel coverage or receive policy notifications).

In summary, insurance coverage is more complicated than most people acknowledge.  Although almost all "homeowner" policies do approximately the same things in (1) protecting the homeowner from loss of or damage to the property and (2) protecting the homeowner from liability for occurrences on the property, how these coverages work after the death of the insured can be complicated, particularly if property passes automatically at the time of death.  If limited coverage and rights under the policy are sufficient, an additional insured endorsement may be sufficient.  If the goal is to obtain complete and distinct coverage from all potential liability, being included as an additional named insured is better, keeping in mind that the insured must have an insurable interest at the time of the loss.

Insurance companies reject claims when there is possibility that the claim may not be enforced.  The automatic transfer of interest to a beneficiary that is an additional named insured seems clear enough, but what of the interest of a contingent beneficiary?  What if the condition creating liability pre-dated the death of the owner, and what if the date of the loss is uncertain? At a minimum, it is fair to say that a TODDA should only be used only when advised by a competent and skilled lawyer, after consideration of the specific circumstances involved, and the objectives of the property owner.  

As an alternative to a TODDA, one could simply settle a revocable trust, convey the property to him or herself as trustee, and obtain insurance in the name of the trust that will own the property both before and after the owner's death, at least until the trustee sells or distributes the real estate in accordance with the terms of the trust.  The insurance coverage issue is not complicated or impaired with the use of a trust and insurance insuring the trustee of that trust.   

Thanks to the lawyers at Carlile Patchen & Murphy LLP, for the excellent article that served as the inspiration for this article.     

Beware Direct Transfer Designations (TODs and PODs)

If you are planning to Age in Place, you should not rely upon direct transfer designations, like POD's (payable on death designations) and TOD's (transfer on death designations), or simple beneficiary designations as a primary component of your estate plan.  These designations are mechanisms by which an account or other asset is transferred or paid on the death of the owner to a beneficiary. They are often recommended by the administrator of the account, such as a bank, broker or life insurance company. While these can be very effective and inexpensive means by which to avoid probate and transfer assets at death, they are not without their risks and challenges. A lack of careful consideration of the risks and rewards of these mechanisms can be disastrous. A carefully prepared estate plan will consider, and resolve, all of the risks and challenges they present.

Benefits of Direct Transfer Designations

Direct transfer designations have several benefits. The most important benefit is that they are inexpensive and relatively easy to employ. Most institutions will permit you to make such designations as a service, for no additional fee. They are simple to create, and there is no need for an attorney or other professional. Most of these designations are made by account owners without legal or professional advice or counsel. Particularly because of this simplicity, they are very popular.

The second benefit is that the payment or transfer is more or less immediate and direct. Where there is a need to make cash or other liquid assets immediately available to a child or grandchild for some purpose, a TOD or POD appears attractive at first glance. Beneficiary transfers, however, typically require claim forms, and documentation in support of the claim. In reality, the process may take more time and effort than succession of ownership (such as through a living trust or joint tenancy with right of survivorship). Nonetheless, it is the assumption that funds are available immediately that often causes folks to choose direct transfer designations.

Unquestionably, direct transfers can have unique benefits as a result of direct payment to a beneficiary, whether or not immediate. For example, if you are widowed and want the bulk of your estate to pass to your children, but still desire a particular asset, fund, account or benefit to pass to a significant other or second spouse, without involvement of your children, a direct transfer seems suited for this purpose. Of course, such circumstances are specific, unique, and situational. The proper method for accomplishing an intended result depends upon first carefully considering all options to ensure that the proper tool is selected.

The third benefit is that a direct transfer designation may avoid probate, provided, however, that the beneficiary is alive at the death of the account holder or owner, and there is no intervening circumstance that interrupts direct payment to the living beneficiary; a beneficiary's disability, need for government benefits eligibility, creditors, marital disputes, and the like, may frustrate an effort to protect assets from legal or court administration. 

If the beneficiary passes before or after, the asset may be probated. Particularly because the avoidance of probate may not be effective, TOD's and POD's are of limited utility in a carefully planned estate. Not surprisingly, because they are available at little or no cost, they are often used for the sole purpose of avoiding probate - an inexpensive substitute for more comprehensive planning. Make no mistake--these devices are NOT substitutes for comprehensive plans or living trusts. If you have utilized TOD's or POD's in your estate plan, particularly if you have done so without professional guidance, you may want to consider carefully the many possible disadvantages of these tools, and consider a more appropriate planning technique.

These designations simply do not, at least effectively, accomplish goals best achieved by proper estate planning. For example, these devices do not avoid estate taxes, reduce the risk of guardianship, protect assets from control by a court-appointed guardian, or permit in and of themselves management of assets during periods of incompetency or incapacity. They may not even avoid probate of the asset.

Additionally, there are several potential drawbacks to such devices, particularly if they are used without careful consideration or the advice of counsel. The biggest drawback to these plans is that they do not and cannot plan for contingencies. Additionally, use of such designations can cause illiquid estates, lead to or cause unintended disinheritance, lead to lawsuits or disputes, and can facilitate or encourage guardianship.

Proceeds from Direct Transfer Designations Do Not Have to be Used as Intended

Among the most common mistakes is to leave an account to a particular person, usually the person you intend to be the executor of the estate, for a specific purpose such as paying your funeral bill, or satisfying a mortgage. Unfortunately, the beneficiary is not required to use the funds for your intended purpose.  This can result in one of your children receiving a windfall, by pocketing the account, and having the obligation to be paid from other estate assets. 

Consider the following example:

Mrs. Smith leaves a twenty thousand dollar ($20,000.00) CD payable upon death to her daughter Patty, her executor, so that Patty will have immediate funds available to pay the funeral bill.  Mrs. Smith directs her home and her bank and savings accounts, worth a combined one hundred and fifty thousand dollars ($150,000.00) to her three daughters by way of a Last Will and Testament. 

Although she intended each daughter to receive an equal amount, or fifty thousand dollars ($50,0000.00), this is not the result. Patty keeps the twenty thousand dollars ($20,000.00) as her own.  Patty acts as executor of the estate, and pays the ten thousand ($10,000.00) funeral bill as an expense of the estate. Patty pays six thousand five hundred dollars ($6,500.00) in medical and other bills, and expenses from the estate.  Patty is paid six thousand dollars ($6000.00) as the executor, and an attorney is paid seven thousand five hundred dollars ($7500.00) in attorneys fees, costs and expenses. The resulting net estate is one hundred thirty thousand dollars ($130,000.00), resulting in each daughter receiving an equal approximately forty-three thousand dollars ($43,333.33).  Patty received total distributions from her mother in the amount of sixty three thousand dollars ($63,333.33), twenty thousand more than her sisters. Additionally, Patty also received an executor's fee for the work that she performed in settling the estate.  

Direct Transfer Designations Do Not Avoid Estate Tax

If you have any incident of ownership in or to an account or other asset, it will be included in your taxable estate for estate tax purposes. Consequently, direct transfer designations are not appropriate tools for estate tax planning.  If you intend to remove the value of the asset from your taxable estate, you must do more. Generally, unless some other reason for excluding the account exists, the account will be included in your taxable estate notwithstanding the direct transfer designation.

POD's and TOD's May Not Avoid Probate

There are numerous instances where these techniques have been used to avoid probate, and yet the assets of the estate are nonetheless probated. Transfer upon death designations are not typically made for personal property, and may in fact be unavailable to transfer such assets. If there are sufficient assets to probate, the other assets will pass through probate, even if liquid or other property avoids probate.

Moreover, these designations do nothing to protect assets from administration by a guardian or conservator in the event of incompetence or incapacity. They also do not prevent challenges to a will, appointment of executor, or other legal disputes which may ultimately be resolved by the probate court.

Finally, these designations will not avoid probate if the beneficiary passes away either before or after the account or asset owner. A probate administration may be necessitated, whereas property passing by way of trust will not need to be probated in the event of the death of an heir, whether that death occurs before or after death of the owner.

Direct Transfer Designations Do Not Aid In Aging in Place

Aging in Place is the desire of almost every senior.  For some, it is only a  hope, desire, or aspiration.  For others, it is a fundamental objective forming the basis of a comprehensive estate and financial plan. Direct Transfer Designations do nothing to aid in a plan designed to enable you to Age in Place.  Simply, because these designations only "work" after you have passed, they are incapable of aiding in your efforts to Age in Place.  

Moreover, to the extent that the use of such designations abandons more comprehensive plans that, for example, change traditional fiduciary duties to permit use of assets for more expensive alternatives to institutional care, they indirectly frustrate your Aging in Place plans.  For more information regarding Aging in Place, go here.    

Direct Transfer Designations Do Not Avoid Guardianship

Direct transfer designations do nothing to protect assets from administration by a guardian or conservator in the event of incompetence or incapacity. Failing to protect yourself and your estate from guardianship impairs any plan to Age in Place.  For more information regarding the danger of guardianship generally, consider the Open Letter to Congress, drafted by the National Association to Stop Guardian Abuse, or review Guardianship over the Elderly: Security Provided or Freedoms Denied?, Hearing Before the Special Committee on Aging, United States Senate.

 Direct Transfer Designations May Create Illiquid Probate Estates

One potential drawback to these designations, particularly when placed on all liquid checking, savings, and investment accounts is that an estate can be made illiquid. Lack of liquidity can be a problem where there is real estate, personal property, or other assets that must be probated. Probate administration and estate taxes must be paid, and if the probate estate is insufficient to do so, heirs may be required to return cash to the estate, or property may be sold at fire sale prices to satisfy obligations. It is important to consider that ad hoc asset level planning to avoid probate often leaves assets to be probated.

Direct Transfer Designations Do Not Plan For Contingencies

The biggest disadvantage is that these devises are usually limited, and do not provide for contingencies. These plans very rarely answer the "what if?" questions considered by a carefully prepared estate plan. For example, what if the transferee or payee dies shortly before or after the owner? In most cases, the designation will simply pay the estate of the deceased transferee or payee. If, for example, the payee is your son, and he dies before you, without a will, the account or asset will be paid in whole or part to your daughter-in-law. You may desire that no part of your estate pass to the spouses of your children, in order to protect your grandchildren in the event of remarriage. Moreover, if you intended to avoid probate of your assets, you may fail in your efforts.

There are numerous examples of contingencies that a living or even a testamentary trust can address which are not typically addressed by POD's and TOD's. What if the property passes intentionally or unintentionally to a minor? Do you want the property to be distributed to the minor upon his or her reaching age eighteen or obtaining emancipation, or would you prefer to protect minors from their inexperience and lack of wisdom in managing assets?  Did you anticipate that a guardian for the minor may need to be appointed in the probate court to oversee the assets, with the attendant burden, cost, and expense, even if you trust the minor's parents to manage the assets? 

What if the heir has financial difficulties, lawsuits, judgment liens, tax liens, or similar problems at the time of your death? If you do not intend your assets to pay the claims of third parties against your heirs, you should consider an alternative to a simple TOD or POD.

What if your heir is undergoing a divorce, dissolution, separation, or other marital difficulty? A TOD or POD may or may not be involved in such a dispute, depending upon a number of factors and your state law.

What if an heir is handicapped mentally or physically at the time of your death. If you want to protect that heir, you may want more than a simple TOD or POD.

What if an heir suffers from a substance abuse or other dependency that could affect their ability to manage their affairs? TOD and POD clauses rarely protect a family from such contingencies.

What if an heir joins or becomes a member of a religious organization, cult, or other organization pursuant to which your heir agrees to surrender or deliver all of the heir's assets? You may not want your worldly possessions to facilitate or benefit the organization or cult.

What if there is a dispute, contest, or lawsuit? How is the dispute to be resolved, and on what basis?

Regardless which "what if" question concerns you now, you should consider many possible contingencies. As a result, a carefully considered and well drafted estate plan will consider and provide solutions to all of these and many more. TOD's and POD's simply have no solutions, because they are not, in and of themselves, "plans."

Direct Transfer Designations Can Lead to Unintended Disinheritance

Another disadvantage of direct transfers is that they can lead to unintended disinheritance. This occurs because folks often use these to segregate accounts. In other words, a person will select one account with a TOD or POD designation for one heir, and another account for another heir. This is often done to keep confidential account balances which may favor one heir as against another. These can be disastrous in an estate plan. Consider the following example:

Mrs. Smith has three children and three CD's. Two CD's are worth ten thousand dollars ($10,000.00), but the third is worth twenty five thousand dollars ($25,000.00). Smith's oldest daughter lives very near, is often helpful in Smith's day-to-day activities, and is Smith's designated attorney-in-fact/agent. Smith makes the larger CD payable upon death (POD) to the oldest daughter, but makes the others payable to the other children. Unfortunately, Smith suffers a stroke and undergoes lengthy period of convalescence, including a stay in a nursing home. The expenses require the daughter, now acting through power of attorney, to liquidate one of the smaller CD's, and to liquidate the larger CD to cash, of which she spends ten thousand dollars ($10,000.00). Assuming the only asset remaining at Smith's death is the checking account, which is now worth only approximately fifteen thousand dollars ($15,000.00), and the remaining CD which is worth ten thousand dollars ($10,000.00), you can see how the POD failed to effectuate her wishes. The checking account is divided equally between the children (five thousand dollars ($5000.00) each. Widow Smith probably assumed like many people that the checking account would only have a nominal amount of money in the account, which may not be true as the family deals with medical or other crises. Instead of the oldest daughter receiving twenty five thousand dollars ($25,000.00), she receives only five thousand ($5000.00). One of the other children receives fifteen thousand dollars ($15,000.00). It is obvious the results were not in keeping with the intentions of Widow Smith.

An Attorney-in-Fact May Change Your Wishes

Most people who have utilized direct transfer designations assume that their estate plan is set, and their wishes will be followed. Sadly, nothing could be further from the truth. A direct transfer designation is typically a contractual right, which can be changed by an attorney-in-fact. Moreover, an asset can be transferred, and the designation "undone" by any person with authority over you or your estate, such as a guardian or conservator. Bottom line? A beneficiary designation is simply not an adequate estate plan for most people.

Direct Transfer Designations May Lead to Lawsuits Or Disputes

For all of the foregoing reasons, and countless others, direct transfer designations may cause your estate to be contested, and may encourage, rather than discourage lawsuits and litigation.  Particularly because these designations may create expectations in the minds of heirs, and because their use certainly does not discourage, and may encourage disputes, reliance on these in your estate plan might even encourage a guardianship application by an otherwise well-meaning heir as he or she seeks to protect their inheritance from others.

Guardianship proceedings may be necessitated by assets passing to contingent beneficiaries, as well, such as underage grandchildren. Since the goal of such designations is primarily probate avoidance, careful and limited use of such designations in an estate plan is warranted.

There is no substitute for a carefully considered and well drafted trust to ensure that your wishes are expressed and carried out.

[Note: This article is largely based upon another, earlier article written by Attorney Donohew, which article can be found here.]  

Mishandling of Nursing Home Trust Accounts a Growing Problem

Many nursing home residents have have "resident trust funds" or "personal accounts" managed by the facility. It may be that the residents have no family members or family members do not want the responsibility, or the nursing facility prefers to manage the resident’s income. Recently, USA Today did an investigative report in which 1,500 facilities have been cited for mishandling of funds in such resident trust accounts. Most of the deficiencies were related to failing to pay interest on the money held, inadequate accounting, or failure to give residents sufficient access to their money. However, there were egregious cases where funds were misappropriated by those who were intended to protect them. Go here to read the full article.   

The USA Today article explains the problem, describes specific examples of account misuse, and provides some practical solutions to  minimize the risk of loss associated with these accounts.  In every case, the resident should have an effective General Durable Power of Attorney in place naming a trusted agent and  alternates. Many nursing home residents are unable to monitor their own accounts, or may be unable to monitor their own accounts during periods of illness, disability, or incapacity. An attorney-in-fact empowered by a Power of Attorney document can monitor the resident account, and even minimize its use by keeping a limited amount of funds in the account. If the agent is willing and able to pay the resident’s bills, the use of the account will be limited to small purchases and will be less tempting to those who are using the accounts for their own purposes.

Fortunately, the resident fund accounts are usually insured.  An attorney-in-fact can make a claim against the insurance company is a loss is discovered.  Such a claim may be frustrated if the resident is unable to prosecute a claim.  It is important that losses are identified quickly, and claims made timely.  

The attorney-in-fact should also make sure that ultimate disposition of the account is provided for, either by an assignment of the account to the resident's revocable trust, or by a transfer upon death or payable upon death designation.  Otherwise the account may require probate court disposition.    

Beware Direct Transfer Designations (TOD's/POD's)

Direct transfer designations, like POD's (payable on death designations) and TOD's (transfer on death designations), and simple beneficiary designations, are mechanisms by which an account or other asset is transferred or paid upon the death of the account holder or asset owner to a beneficiary. They are often recommended by the administrator of the account, such as a bank, broker or life insurance company. While these can be very effective and inexpensive means by which to avoid probate and transfer assets at death, they are not without their risks and challenges. A lack of careful consideration of the risks and rewards of these mechanisms can be disastrous. A carefully prepared estate plan will consider, and resolve, all of the risks and challenges of these mechanisms.

Benefits of Direct Transfer Designations

Direct transfer designations, such as POD's and TOD's have several benefits. The most important benefits are that they are cheap and easy. Most institutions will permit you to make such designations as a service, for no additional fee. They are simple to create, and there is no need for an attorney or other professional. Most of these designations are made by account owners without legal or professional advice or counsel. Particularly because of their simplicity, they are very popular.

The second benefit is that the payment or transfer is more or less immediate and direct. Where there is a need to make cash or other liquid assets immediately available to a child or grandchild for some purpose, a TOD or POD appear attractive at first glance. Beneficiary transfers, however, typically require claim forms, and documentation in support of the claim. In reality, the process may take more time and effort than succession of ownership (such as through a living trust or joint tenancy with right of survivorship). Nonetheless, it is the assumption that funds are available immediately that often causes folks to choose direct transfer designations.