Beneficiary Designations, etc., Aren’t a True Substitute for a Trust

TOD (Transfer on Death) designations, POD (Pay on Death) designations, and beneficiary designations can be useful in the right circumstances. Each of these tools allows for an automatic transfer to the named beneficiary at the death of the owner. But these tools can have a few shortfalls.

What if the beneficiary has passed away?

First, if the named beneficiary predeceases the owner, typically it will not be effective to transfer the assets. Sometimes, you could name a contingent beneficiary and then it would go to that person. But, if there is no contingent beneficiary or if they also predecease the owner, the assets may end up in the probate estate of the owner (often what the owner was trying to avoid). Sometimes the account agreement with the financial institution might specify an alternate disposition, like to the spouse or next of kin rather than the probate estate of the owner.

How is joint tenancy similar?

Joint tenancy has a similar drawback. Property is included in that owner’s estate upon the death of the last joint tenant. Joint tenancy has an additional hazard during lifetime which can be illustrated by this example. Mary has only one child, John. Mary wants to transfer all her assets to John at her death. She hears that an easy way to avoid probate is to add John as a joint tenant, so she does that. John gets sued. Unfortunately, Mary’s property held in joint tenancy with John is an asset that can be subject to John’s creditors. So, the “easy” estate planning method became quite costly for Mary.

What if  you are incapacitated?

Another drawback of TOD, POD, beneficiary designations and joint tenancy is they do not plan for the incapacity of the owner. In other words, if the owner becomes incapacitated, the existence of that form of ownership doesn’t help with regard to the management of the asset during the owner’s life.

A revocable trust is typically a better solution and avoids these drawbacks. First, the disposition at death can be much more flexible. You can have multiple contingent takers upon your death. Also, the assets can go to the beneficiaries in a manner which is better for the beneficiaries. (The next blog will focus on this perspective.) Assets in the trust are not subject to the creditors of those intended to receive the asset, unlike with joint tenancy. Finally, a trust provides management of the assets during periods of the owner’s incapacity. While a durable property power of attorney could also accomplish this, it is not as readily accepted due to financial institutions’ reluctance to rely on such documents due to incidents of fraud. A revocable trust is much more readily accepted.

While joint tenancy, TOD, POD, and beneficiary designations are simple and can work in some circumstances, they have their drawbacks as outlined above. A revocable trust is typically a better way to achieve your goals.

Stephen C. Hartnett, J.D., LL.M.
Director of Education
American Academy of Estate Planning Attorneys, Inc.
9444 Balboa Avenue, Suite 300
San Diego, California 92123
Phone: (858) 453-2128
www.aaepa.com