Avoiding Probate

Avoiding Probate

A complex part of retirement preparation is transferring your assets to your heirs. If done incorrectly, that transfer could cause undue taxes and fees that will diminish the legacy that your loved ones get to enjoy. Common ways to dictate the passing down of assets to beneficiaries and heirs is through the use of a notarized will and testament. One of the issues with solely relying on a will, however, is that in order for beneficiaries to access their inheritance, they must first go through a process called probate to verify the will’s authenticity. Once completed, the court will then appoint, or grant legal power to, an executor or administrator who will collect the assets and distribute them accordingly. This is a lengthy, public process that can also be contested by individuals who find out about the proceedings. 

For grieving families, the probate process can be stressful and add unnecessary drama from outside sources who may try to stake a claim on portions of the assets in question. When someone passes away with a written will, the executor must take the will to the probate court and start the process of validating the document in order to give the executor the legal power to distribute the assets in the will; in accordance with the probate court, the executor must settle any debts owed by the deceased as well as filing their income taxes at the end of the year. Additionally, the executor must also consider any real estate that is in the deceased’s name and pay taxes on those accounts. Once the deceased’s financial obligations are accounted for, the remaining value of their assets can then be distributed to the named beneficiaries in their will. 

There are also situations where an individual will pass away without a written will and in cases like this, the court will appoint an administrator. An administrator acts similarly to an executor in the sense that they will collect and value the assets of the deceased, pay their existing financial obligations and then in accordance with the rules of the residing state, the administrator will divide the assets between the surviving spouse and any children. When no will is available or valid, and the deceased has no surviving spouse or children, the remaining assets are typically confiscated by the state. Overall, the process of validating the will, collecting the assets, settling any existing financial obligations, and finally distributing the remaining assets can take up to two years to complete. 

That being said, there are ways to avoid the probate process and eliminate the hassle of passing along inheritance to your beneficiaries and heirs. Rather than put your executors through the dreadful process of probate to distribute your assets, there are short acronyms that you can use on applicable accounts that will automatically transfer the assets in question directly to your beneficiaries upon certification of your death. By setting up investment accounts with the term “Transfer on Death,” or TOD for short, the named beneficiaries of the account can avoid probate and have the account’s assets transferred to them by simply presenting the holding company with a valid death certificate and personal identification. 

TOD accounts are specific to brokerage investments such as stocks, bonds, and mutual funds. IRA accounts as well as 401(k)s are TOD as the owner has the ability to name beneficiaries when opening an account. Setting up a TOD account is as simple as contacting the investment company and requesting to add the designation to any of the owned accounts. Doing so will allow the account holder to name as many beneficiaries as they please, while also dividing up the asset percentagewise for each beneficiary. When the account owner becomes deceased, those beneficiaries will have to present a valid death certificate along with other identification and those assets will be automatically transferred to their name without the hassle of going through the probate process. 

The acronym POD relates to banks and credit unions and operates similarly to how TOD accounts work for securities-based accounts. Savings accounts, checking accounts, certificates of deposit, and more can be designated POD to be automatically transferred to the named beneficiaries on the account following the death of the account owner. Just as the account holder must contact their broker to add a TOD designation, they must contact their bank or credit union to add the designation POD to indicate who should receive the funds after their death. Just like TOD account designations, a POD account enables the named beneficiaries to bypass the probate process. Additionally, if something were to happen to the named POD or TOD beneficiary, account owners can also include “per stirpes” to ensure that the inheritance follows the beneficiary’s bloodline. 

Understanding how to utilize these little-known tools in retirement can make the estate planning process much easier when passing on and leaving inheritance to beneficiaries and heirs. Most importantly, the Transfer on Death and Payable on Death designations supersede the language written in a will and testament. For example, if an account holder writes in their will that their son should inherit the assets that are held in their bank accounts, but also applied an appropriate TOD or POD designation on their accounts dictating that their son and daughter would receive a 50% split of the assets, the designation on the account would be upheld if there was a fight with the executor of the will. Therefore, it is especially important to have a trustworthy will executor, while also accurately updating beneficiary information to ensure that your assets are passed down correctly and in the manner that you best see fit. 

There are situations however where a TOD or POD designation may not be in the best interest of the account holder. Typically, when one spouse passes away, the surviving spouse will assume control of the assets, which also includes the power to add or remove beneficiaries from the estate. Additionally, if the designated beneficiary of an account is a minor, they may not be able to access the account until reaching the age of majority, 18, which may or may not be an issue. Regardless of the situation,  it is important to meet with a retirement phase specialist when making beneficiary designations on any accounts, especially when using a TOD or POD account to bypass probate.