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Using Joint Accounts and Payable on Death Accounts to Avoid Probate

Joint Ownership and POD Accounts Lead to Simple Probate Avoidance

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There are two common and simple ways to avoid probate - using joint accounts and using payable on death accounts (POD), also called transfer on death accounts (TOD), as well as in trust for accounts (ITF), and Totten trusts.

Joint Accounts

If an account is owned jointly in the names of two or more people and it's designated "with rights of survivorship," then when one account owner dies the surviving owners will simply continue to own the account. Probate of this type of joint account simply won't be necessary. Instead, all that the surviving owners will need to do is show the bank or investment company a death certificate for the deceased owner and then the deceased owner's name can be removed from the account. There are, however, several drawbacks to using this type of account:

  • Gifting problems - If the original account owner adds new owners and the new owners don't contribute any money into the account, then the original owner may be deemed to have made a gift of a portion of the account to the new owners for gift tax purposes. If the gift amount exceeds the annual exclusion from gift taxes (currently $13,000 for 2009), then the gift must be reported to the IRS on a gift tax return (Form 709). In addition to the federal gift tax, two states, Connecticut and Tennessee, assess a gift tax at the state level on their residents as well as nonresidents who own real estate in the state.

  • Lawsuits against joint owners - If one of the owners of a jointly owned account is sued, then the funds in the joint account may become subject to a judgment lien. This could wipe out some or possibly all of the account.

  • Disinheriting other beneficiaries - If the original owner adds one child to an account but has other children they want to inherit the account, then by adding one and not all of the children's names the owner will have effectively disinherited all of the other children. And even if the surviving joint owner agrees to give the other children their fair share of the account, care must be taken to avoid any gift tax consequences.

  • Guardianship or conservatorship for minor owners - If the joint owner is a minor, then a court-supervised guardianship or conservatorship will need to be established in order for the account to be used for the minor's benefit. This can be avoided by titling the account in the name of your Revocable Living Trust which establishes a trust for the benefit of the minor after your death.

POD, TOD, ITF and Totten Trust Accounts

Many states have laws that allow you to designate a beneficiary of your bank and investment accounts or individual stock certificates after you die. U.S. savings bonds can also have a payable on death beneficiary. This is another easy way to avoid probate, since all that the beneficiary will need to do is show the bank or investment company a death certificate in order to access the account. As with joint accounts, however, there are several drawbacks to using POD, TOD, ITF or Totten trust accounts:

  • Disinheriting other beneficiaries - If the account owner only designates one beneficiary but has other beneficiaries he or she wants to inherit the account, then the owner will have effectively disinherited all of the other beneficiaries. It's important for the owner to keep the beneficiaries of the account up to date.

  • Death of a beneficiary - If a designated beneficiary predeceases the account owner, then problems could arise in figuring out what amount that the other designated beneficiaries should receive. Also, if there is only one beneficiary designated and he or she predeceases the account owner and the account owner fails to add a new beneficiary prior to his or her death, then the account will become a part of the owner's estate and need to go through probate.

  • Consent of beneficiaries - If the account owner later decides to transfer the account into his or her Revocable Living Trust or wants to make other changes to the account, some financial institutions may require the consent of the designated beneficiaries to make the requested change.

  • Requirement to of the owner to designate equal shares - Some financial institutions require that if more than one beneficiary is designated on a POD, TOD, ITF or Totten trust account, then the beneficiaries must each receive an equal share of the account. This may not be what the account owner wants and will therefore force the account owner to constantly keep an eye on account balances and property values in order to insure that the beneficiaries receive their intended shares.

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