Many accounts fall into the category of payable-on-death that generally transfer outside the probate process. POD options are common for checking and saving accounts and CDs. Transfer-on-death (TOD) provisions are common for 401(k)s, IRAs and other nonretirement brokerage accounts.
In Colorado, a 2013 law allowed account holders to specify proportionate distributions between two or more beneficiaries on POD accounts. The default, however, remains that without a written designation, each listed beneficiary receives an equal amount of the assets. As you can see, beneficiary designations can be powerful tools. But do not make the following mistakes.
Mistake No. 1: listing a beneficiary with credit issues
Loved ones often hide their money issues. It is not always possible to figure out or predict whether a potential beneficiary may have aggressive creditors or a soon-to-be ex-spouse ready to seize a bequest.
Because money or shares pass directly to a beneficiary, they are the same as any other asset and susceptible to a judgment or lawsuit. You can, however, take steps to protect a gift by structuring a transfer through a trust.
Mistake No. 2: failing to plan for incapacity
These types of accounts pass only upon death. And accounts owned by a couple with rights of survivorship pass only upon the death of the second spouse.
It is not necessarily only memory loss or very old age that affects capacity. An unexpected illness or serious car accident could leave a beneficiary on an account without access. A POD account designation does not function as a joint account while the account owner is alive. A conservatorship hearing might be required to gain access to needed funds to pay ongoing expenses, which can cause delays and add costs.
Mistake No. 3: forgetting to update beneficiary designations
Often, you complete beneficiary forms when you set up accounts, so it is easy to write in a name and forget about it. For this reason, when a parent dies or you start divorce proceedings, it is crucial to review and update all beneficiary designations.
If a listed beneficiary predeceases the account owner, the account will go through probate. A listed ex-spouse, rather than children or a current spouse, could inherit, defeating carefully drafted provisions in a will.
While these POD and TOD accounts can play a role in an estate plan, they are not a replacement for comprehensive planning. Mistakes can lead to conflict and ruined relationships. Seek professional legal advice to ensure that you have the tools in place to protect and provide for loved ones.