You are sitting with your attorney, planning your estate, deciding how you want your assets distributed at your death. Important to you is leaving a small cash gift to each of your grandchildren, a gift to your loyal housekeeper, a donation in your memory to your favorite charity, and to make sure your pets will be properly cared for. Your assets include a brokerage account which is your primary asset with about $5 million, your day-to-day checking account with generally a small balance, and an IRA.

Fast forward to your death and the time to distribute to the grandchildren, the housekeeper, charity, and to provide for your pets – none of these beneficiaries will receive anything.

How did this happen?  Back to your attorney’s office —

Your Will is crafted to accomplish your wishes, including that your children will receive the balance of your estate. Your children are also the beneficiaries of your IRA. As the named beneficiaries of the IRA, the children will be able to collect the IRA proceeds upon your death without needing to wait for the probate of your Will (a finding by the local court that the Will is valid).

Other advisers may recommend TOD (transfer on death) or POD (payable on death) designations on accounts, which avoid the probate process altogether. By establishing the brokerage account as a TOD or POD account, the children can receive the brokerage account directly, immediately after your death.  The children are receiving the estate in any event so why not make it easier for them by using this type of account?

You die and it is time to probate your Will, wind up your affairs, pay your debts and final income taxes, pay the professionals assisting in administering your estate, and other estate administration expenses and finally distribute your estate to the beneficiaries named in your Will. However, in reviewing your estate with your family, your attorney discovers that the only asset subject to probate, the only asset passing under your Will, is your checking account with a balance of around $20,000.

“And?” asks the family. This means that there are insufficient funds to cover debts, federal and state income tax liabilities for the year of death, and administration expenses, not to mention that there is no money available to satisfy the bequests to the grandchildren, the housekeeper, charity, and for your pets. “Why?” asks the family. Because after carefully planning the estate with your attorney and preparing the Will to accomplish your specific wishes, a beneficiary designation was added to your primary asset, the brokerage account, without consulting the attorney. The account, therefore, passes directly to the children outside of the Will.

The moral: Establishing TOD or POD accounts can have a drastic effect to your estate plan. Before making such a change, it is very important to consult your estate planning attorney to understand the impact. The use of TOD or POD accounts may be appropriate, but if not used properly can wreak havoc on your planning.

If you have questions on this topic, please contact your SGR Private Wealth Services Attorney.