Beneficiary Designations on Bank and Brokerage Accounts: an Easy Way to Avoid Probate or a Possible Nightmare for Your Family

John went to his bank and set up payable upon death (POD) accounts for his three children. This seemed to John like a simple thing to do to avoid probate and pass his assets directly to his beneficiaries. Unfortunately, one of his children predeceased him. His predeceased child had children of his own. However, because of the bank’s policy, upon John’s death, the deceased child’s share did not go to his children (John’s grandchildren), but rather to the other two children named on the account. Is this what John would have wanted?

Susie set up her brokerage accounts as transferable upon death (TOD) accounts. She named her two children as the beneficiaries. One of her children is disabled and receiving SSI and Medicaid. Susie had set up a supplemental needs trust in her will for this child to protect his receipt of government benefits. However, because she set up the account as a TOD account, her will was not probated. This resulted in the supplemental needs trust not being set up for her disabled child and the brokerage account passed directly to her child. As a result, her disabled child lost his SSI and Medicaid benefits.

Sally had one child and set up a TOD brokerage account. Unfortunately, Sally’s child predeceased her, leaving children of her own.  These grandchildren were minors at the time of Sally’s death. As a result, the Surrogate’s Court had to appoint a guardian for Sally’s grandchildren to manage their assets.  A guardianship is in effect only until the children reach 18 years of age.  Then, the moneys are distributed to the children.  Would Sally have desired for her grandchildren to have control of their respective shares of her estate at such young ages?

Bob had a bank account worth about $100,000 in his sole name and a $100,000 TOD brokerage account, in which he named his friend as beneficiary.  His will named his three nephews as beneficiaries.  When Bob died his will had to be probated to pass the bank account to his nephews.  When a will is probated, the probate assets are used to pay creditors.  Unfortunately, Bob had $75,000 of debt. The result: after the creditor was paid, the three nephews split $25,000 and Bob’s friend received $100,000.  Is this what Bob intended?

It sounds like a simple thing to do to set up POD or TOD accounts and avoid probate. Many well-meaning people have given this advice. However, one must consider the disadvantages of such accounts. If a beneficiary dies, who inherits his or her share? Will it be the other beneficiaries on the account or the children of the deceased beneficiary? How will a POD or TOD account affect the benefits for a special needs beneficiary? What happens if a minor becomes a beneficiary?  Who is going to be responsible to pay the creditors of the deceased?  If you change your mind about your beneficiaries, did you remember to change the beneficiaries of all of your accounts?

Furthermore, very often, a POD or TOD account will not accomplish the stated goal of avoiding probate. For instance, if you own a home that is in your sole name, a probate proceeding will have to be instituted to transfer your home. If the home has to be probated, a POD or TOD account does not accomplish anything at all.

If you wish to avoid probate, you should consider a living trust.  A living trust allows you to determine what happens if one of your beneficiaries predeceases you. You can take care of minor beneficiaries, special needs beneficiaries and others for whom a trust might be advisable. The moral of the story is that you should have a well thought out estate plan that takes into consideration every possible contingency. An estate planning professional can provide you with expert advice on the best way to set up your estate.