Concerns About TOD and POD Accounts

Thursday, September 11, 2014

We have seen an increasing number of situations where a decedent had designated beneficiaries of a bank or investment account, apparently to “avoid probate” and in some cases (according to family members) to avoid the claims of his or her creditors after death. Although beneficiary designations are necessary for IRAs, retirement accounts and life insurance, they are not necessary and are often undesirable for other accounts. Under current Maine law a person can designate a bank or investment account as a “transfer on death” (TOD) or “pay on death” (POD) account and thereby avoid probate because such accounts will not be governed by the provisions of his or her will. However, your doing this will not avoid the claims of your creditors against the assets of your estate (contrary to what many seem to believe); and probate avoidance is generally not a significant consideration in the estate plans of Mainers because of the simplicity of estate administration under the Maine Probate Code. We have concerns about the increasing use of TOD and POD accounts. First and foremost, the beneficiary designations are often not consistent with the estate plan embodied in a person’s will and, in many cases, revocable trust. Since planning for minimization of Maine estate taxes is involved in most of the documents we prepare, we are concerned about the potentially adverse estate tax consequences of an ill-considered beneficiary designation signed without our knowledge or advice. Secondly, if a majority of a person’s liquid assets pass at death in accordance with TOD or POD designations, that decedent’s estate may have insufficient funds available to pay debts, taxes and other expenses, thereby requiring the Personal Representative to go through a lengthy and complicated process to get those assets back into the estate. Further, it can force a disproportionate level of expense on the assets that pass through the estate and result in some beneficiaries receiving little or nothing while others receive proportionately more than the decedent intended.
Given these concerns, we strongly recommend that you confer with us before signing any TOD or POD designation, so that you can make sure a designation makes sense with respect to any given account and that the designation is consistent with your overall estate plan.