We recently received an email from a client asking if he could avoid probate by having transfer-on-death (TOD) designations on all of his accounts. Our response was: “Yes, but…”
We consistently emphasize with our estate planning clients that the foremost objective in their estate plan should be to carry out their testamentary intent; in other words, which of your assets or property do you intend to leave (the “What”) to which of your family and loved ones (the “To Whom”). The question of “How” these assets are to be transferred – whether through probate or some other process – should be secondary.
Unfortunately, many people get so caught up in the “How” aspects of estate planning – i.e., avoiding probate – that they jeopardize their more important estate planning objectives: the “What” and the “To Whom.” This is particularly likely in the case of persons who have numerous accounts – all with TOD beneficiary designations – combined with fairly complicated estate plans.
TOD beneficiary designations can be useful in avoiding probate, but they can also thwart a person’s more important estate planning objectives by needlessly complicating the estate planning process.
In bygone years, before probate avoidance came into vogue and all assets were passed to beneficiaries through the will, changing your estate plan was a relatively easy process: you simply had to execute a new will. We’ve all seen movies or television shows where it is discovered that some hapless murder victim changed his will a few days or hours before being murdered, foiling the murder’s nefarious plans.
If your assets contain TOD designations, however, things are very different. Now, if you wish to change your estate plan, you not only have to execute a new will, but in many cases, you will need to change beneficiary designations on multiple bank or brokerage accounts, as well. This makes the process of changing your estate plan far more cumbersome.
The process of changing beneficiaries on numerous accounts could take weeks or even months. Even if you remember which assets have TOD designations and are proactive in contacting all of your banks, brokers, and financial advisors, the people on the other end may cause delays or even drop the ball altogether, causing disastrous results for your estate plan. And it is the cumbersome nature of this process that can easily frustrate your testamentary intent if you should die before the process is completed and all of the beneficiary designations have been changed.
We recently met with a client who was extremely disappointed to learn that her mother’s testamentary wishes had been thwarted in just this way. Even though the mother had executed a new will to reflect her revised estate plan, the new will was – for all intents and purposes – ineffective because all of the mother’s accounts had TOD designations reflecting the old pattern of distribution. In other words, because the TOD designations were never updated consistent with the mother’s new estate plan, the mother’s new will was effectively null and void. And we had to explain this to the client while she sat across the table from us and quietly sobbed!
In other cases, a person’s testamentary objectives can be frustrated if they mistakenly place a TOD designation on an account that is inconsistent with a will that they executed earlier. For example, we once prepared a will for a client leaving a monetary bequest to her grandchildren equal to half the value of her estate. Later, the client then put a TOD designation on a bank account equal in value to approximately half of her estate. Although the client had always intended to leave half of her estate to her children, they were dismayed to learn after her death that they would be getting nothing, and the grandchildren would be inheriting the client’s entire estate!
So if TOD designations are not the answer, then what is? The answer is simple: to have a clear-cut estate plan that can easily and quickly be changed with the stroke of a pen, set up and fund a revocable living trust. A trust can provide the flexibility needed to make last-minute changes to even the most complicated estate plan, without the time and aggravation of having to change beneficiaries on numerous bank and brokerage accounts.
If you have a somewhat complicated estate plan with numerous bank or brokerage accounts, and if you wish to avoid probate, you should consider setting up a living trust. Your family may be very grateful that you did.
Willi Law Office, LLC has been providing personalized estate planning and probate services to individuals and businesses in Westerville and Central Ohio for over 20 years.