A recent column of mine discussed revocable living trusts and how they may ensure control and privacy of your estate. If you’re not looking to control assets from the grave, and your objective is to simply avoid probate in order to make life easier for executors and beneficiaries, then there are alternatives to trust-based estate plans that you may find useful.  In fact, with the strategies discussed in this month’s column, you can minimize (and in many cases eliminate altogether) the impact of probate without shelling out thousands on attorney fees.

For starters, make sure your retirement plans, life insurance policies, and annuity contracts have a designated primary and contingent beneficiary, as these assets will transfer to the named beneficiary, without probate, upon your death. Where it gets interesting is it’s also possible to set up non-retirement assets, such as bank accounts, brokerage accounts, and mutual fund accounts, which are typically probate assets, to transfer outside of probate as well.

This may be accomplished through the use of Payable on Death (POD) and Transfer on Death (TOD) registrations, which for all intents and purposes work very much like beneficiary designations on life insurance and retirement accounts. These registrations are sometimes referred to as a “poor man’s trust” because there is little to no cost and provide the benefit of avoiding probate.  PODs are available for bank assets, such as checking accounts, savings accounts and CD’s. TODs are used for transferring investment accounts, such as stock and bond accounts, brokerage accounts, and mutual fund accounts to designated beneficiaries.  To add a POD or TOD registration to an account, simply notify your financial institution and complete the necessary paperwork. Upon your death, the beneficiary will simply provide the financial institution with a certified copy of your death certificate, along with proof of his or her identity, and the assets will be transferred accordingly.

Note, TOD registrations are available in every state except for Louisiana and Texas.

Unlike adding a son or daughter as a joint owner (which I strongly discourage for multiple reasons), adding a beneficiary via a POD or TOD registration in no way relinquishes or transfers ownership rights of the account. Furthermore, the beneficiary on a POD and TOD account may be changed or revoked at any time, or the account may be spent down or closed.

POD and TOD designations provide no asset protection – the account is subject to claims from creditors or other liabilities such as child support or spousal support.  If you wish to name someone other than your spouse as beneficiary, it’s advisable to obtain their consent in writing to avoid possible spousal claims.  For instance, in community property states, a spouse would be considered half owner and could claim half of the account unless they previously consented to the POD or TOD designation.

Through the use of POD and TOD designations, it’s possible to have virtually all financial assets pass to beneficiaries without going through probate, but what about homes and other real estate property? Fortunately, 25 states now permit the use of TOD Deeds, making it possible to pass real property outside of probate as well.  If your state doesn’t allow them now, keep checking – my home state of Virginia didn’t allow them until 2013.

Similar to a TOD on financial assets, a TOD Deed transfers real estate to a designated beneficiary without relinquishing any control of the property until death, at which time, ownership is transferred to the beneficiary, along with any mortgage or debt on the property.  Best of all, the delay and expense of probate is avoided, and the only legal costs would likely be attorney’s fees associated with drafting and filing the TOD Deed.

If you are interested in any of these “simple trust” alternatives, be sure to research your state regulations, as well as any rules your financial institution may have. This is important, because rules vary from state to state and financial institution to financial institution.

For example, some states, such as Virginia, allow TOD registrations for vehicles, while other states, such as Maryland do not. Also, although POD and TOD registrations may be added to individually owned and jointly owned accounts, there are some financial institutions, such as Vanguard, which will only permit TOD registrations on individually owned accounts.

Through the use of POD and TOD designations, it’s possible to facilitate the simple transfer of assets to your heirs, without the hassle of probate, and without the cost of a trust.

Securities and Advisory Services offered through The Strategic Financial Alliance, Inc. (SFA) – Member FINRA, SIPC
This information is not intended to be a substitute for specific individualized tax, legal or investment planning advice as individual situations will vary.  The SFA does not provide tax or legal advice. We cannot guarantee future financial results.