Putting together a well-written and properly executed estate plan is not the only way to ensure assets are distributed efficiently upon death. In some cases, particularly when an individual’s assets and family structure are relatively simple, properly updating beneficiary designations and completing Transfer on Death (TOD) or Payable on Death (POD) forms can accomplish many of the same goals as a formal estate plan.
Let’s walk through an example to illustrate how this works:
Jane Doe is in her 80s. She has two adult children, John Jr. and Sally. Her husband, John Sr., passed away two years ago without a Will, and the probate process was difficult for the family. Now that his estate has been settled, John Jr. and Sally want to ensure their mother’s affairs are in order. They believe Jane needs a Will, but let’s review her asset picture to determine the most efficient approach. Jane’s goal is simple: she wants all of her assets to pass equally to her two children.
Jane’s Assets:
- Bank Account(s): Checking and savings accounts at Wells Fargo. These accounts are owned by Jane, meaning only her name is indicated as an authorized signatory on these accounts.
- Retirement Account(s): Roth IRA at Morgan Stanley. The current beneficiaries on that account are John Jr. and Sally, 50/50.
- Real Estate: Jane and John Sr. owned a home together as Joint Tenants with Rights of Survivorship. When John Sr. passed away, Jane remained the sole owner of this property. John Jr. and Sally have helped their mother move to an assisted living facility and are wondering if their mother should continue paying the expenses associated with the property or work on selling it.
- Income: Ongoing pension payments from John Sr.’s plan and Social Security
Let’s review each asset in turn:
The Bank Account(s).
Hack #1: Add Children as Co-Owners: Jane could add John Jr. and/or Sally as co-owners or authorized signatories. This would allow them to manage the accounts immediately and access funds upon Jane’s death without court involvement. However, this also gives them full access during her lifetime, which may or may not be desirable.
Hack #2: A Financial Power of Attorney: A Financial Power of Attorney would allow Jane’s children to manage the account(s) but only during Jane’s lifetime. This authority terminates at Jane’s death.
Hack #3: Transfer on Death (TOD) / Payable on Death (POD): Jane can complete a “Transfer on Death” or “Pay on Death” (bank dependent terminology) form wherein she designates John Jr. and Sally as the individuals to take over the account at her passing. If Jane does this, John Jr. and Sally can go straight to the bank without the need for a Will and/or permission from the Probate Court to take over the cash remaining in these account(s).
Rely on Will: If none of the above options are pursued, Jane’s Will dictates the distribution of the cash remaining in her bank account(s). The Executor will need to provide Wells Fargo with proof of authority to act as Executor (by being awarded Letters Testamentary by the probate court). Once all requisite documentation is provided, the Executor can move the cash into an estate bank account to be held for eventual distribution to Jane’s listed beneficiaries in her Will.
The Retirement Account
Since it appears that Jane has updated the beneficiaries on her retirement account to her children in equal shares, it is likely that no further updates or changes need to be made.
Here’s the hack: It is extremely important to double check that beneficiary designations on retirement accounts and life insurance policies are properly updated, as the beneficiary designation will dictate where the money from that asset flows, not the Will or any other instruction. To check this, you will need to go directly to the custodian of the account (in this case, Morgan Stanley) and check either through an online portal, human point of contact, or customer service over the phone, that beneficiaries are designated as desired.
The House (no real hacks, just options)
Though Jane is now living in an assisted living facility, she remains the sole owner of her home. Jane, John Jr., and Sally must consider if it makes sense for Jane to continue owning her home, or to instead sell it. One consideration in this analysis is if the sale of the home will incur a large capital gains tax bill. If so, it may make sense for Jane to continue owning the home during her lifetime and then pass the property to her children at her death (likely using a Will) so that they may get a step up in basis, thus avoiding the capital gains tax liability.
If Jane chooses to sell the property during her lifetime (perhaps there is no capital gains concern and her children know they do not want to own the home), then a Will or other estate planning tool is not needed as this asset would no longer be owned by Jane at her passing.
If Jane chooses to continue owning the property, a Will or a “Transfer on Death Deed” (see other articles we’ve written on this tool here) will be the preferred methods to pass her interest in this property to her children.
Pension/SS Income
Generally, pension plans and social security provide for one level of transfer after the primary account holder passes away, and usually that’s to the spouse. Ultimate disposition of the pension plan will be dictated by the specific terms of the plan. In this case, we assume these payments will terminate upon Jane’s death. As a result, no additional estate planning is required for these assets.
In Jane’s case, most of her assets can pass directly to her children through beneficiary designations and TOD/POD forms. With proper coordination, these tools can effectively avoid probate and achieve Jane’s stated goal of a 50/50 distribution. The house is the primary “issue” and for most people, real property tends to be a good reason to move forward with a more formal estate plan.
Additionally, even if these hacks are effectively used, important considerations remain such as: what if one of Jane’s children predeceases her? Who is responsible for final expenses and administrative matters at Jane’s passing? What if Jane’s children stop getting along? A thoughtfully prepared estate plan provides a safety net for unexpected scenarios or missing information.
In practice, many individuals benefit from a hybrid approach: using beneficiary designations and transfer tools where appropriate, while also having a basic Will in place to cover any gaps and provide overall structure.