Navigating Probate: The Strategic Advantage of PODs and TODs

Oct 7

Succession planning is normally the last thing on a young to middle-aged persons mind but a large part about how you create a legacy that can last the test of time is dependent upon how you provide for the next generation and how your assets will be used after you pass. A significant concern of any individual in crafting their estate plans is how they can avoid the expense and time expenditure associated with the probate process.[i] Two unique tools that can allow an individual to bypass the probate process is the Payable on Death Designation (POD) and Transfer on Death Designation (TOD).[ii] This article is going to dive into what the probate process is, why it can be expensive to you, and how the tools of PODs and TODs can be used to streamline the transferring of your assets after death to ensure your legacy continues on.

The first question that needs addressed is what is Probate? Probate is “the formal legal process that gives recognition to a will [or state intestacy laws] and appoints the executor or personal representative who will administer the estate and distribute assets to the intended beneficiaries.”[iii] The assets that are administered through probate includes all property that is titled in the name of the individual, and which is not transferred via another method outside of the constraints of probate or a testamentary estate.[iv] The criticism that arises with probate is the excessive costs that arise when an individual’s assets are administered through the probate court, these costs will be explored below, and how an individual can avoid such expenses with simple planning.

The costs associated with probate administration can include filing fees, executor fees, accounting fees, attorney fees, and estate administration fees, in total these expenses can amount to between 3%-10% of the estate’s value.[v] Filing fees will not necessarily amount to a large expense for the estate, however, if you have a larger estate with lots of assets then filling fees can accumulate to a larger expense. [vi] Executor fees vary tremendously based upon the state probate laws, which can set fee schedules via statute, and if applicable the fee can be set by a Will.[vii] The executor’s duties that make a fee merited include opening the estate, discovering assets, providing the requisite notices to heirs and interested parties, and managing the administration of the estate to name a few of the many tasks that, an executor may have to do. [viii] The attorney fees that an estate will have to pay will vary on the type of attorney you hire and the complexity of the estate but an expected cost of two hundred to four hundred dollars an hour should be expected.[ix]As can be seen having to undergo a probate administration will entail lots of expenses that make the probate process extremely unfavorable, however, there are ways to avoid probate which we will discuss in the following section.

Here is where tools like POD and TOD come into play as an assessable and convenient tool to avoid the financial costs and the time expense associated with the Probate Process. “POD is an arrangement between a bank or credit union and a client that designates beneficiaries to receive all of the client’s assets. The immediate transfer of assets is triggered by the death of the client.”[x] The “(TOD) designation allows an account holder to pass assets from brokerage accounts, stocks, and bonds at their death, bypassing probate. The account holder or security owner specifies the percentage of assets each person receives.”[xi] While a POD and TOD operate in the same manner to transfer assets from one individual to another at the time of death by bypassing the probate process. [xii] However, the difference arises in how the assets are transferred with a POD versus a TOD because with a POD the assets are liquidized and paid out to the beneficiary, whereas with a TOD designation assets are transferred in-kind to the beneficiary. [xiii] As an example, if you had real estate with a TOD designation upon it, at your death that property would transfer to your named beneficiary outside of probate. While understanding how POD and TOD operate is useful, but understanding how to actually make an account or property TOD or POD is the next question you may wonder.

Normally most financial institutions or brokerages have their own internal system for designating an account as POD or TOD which can be as easy as clicking a button and listing your beneficiaries.[xiv] However, real property is not as easy, first, if a TOD is allowed in your state, then normally you must execute a document that designates the property as Transferable on Death. Upon the original owner’s death, the heirs would have a transfer on death affidavit completed, which would transfer the property to the beneficiaries on the TOD designation document, all without the process of probate. Overall, the process of making an account POD or a property TOD is quite simple and very achievable to an ordinary individual, which makes them useful tools that everyone should include in their estate plan.

The probate process can be extremely time-intensive, financially expensive, and personally an overall daunting endeavor, but this process can be avoided with simple TOD and POD designated accounts. These designated accounts and properties provide a way for the owner to avoid probate and have their assets pass directly to the stated beneficiary upon the death of the original owner. However, it goes without saying that these accounts must designated as POD or TOD before death, so a little early planning could save your family from belaboring under a complex and cumbersome probate process.

[i] https://www.forbes.com/sites/bobcarlson/2018/02/26/7-big-estate-planning-mistakes-not-avoiding-probate/

[ii] https://smartasset.com/estate-planning/payable-on-death-vs-transfer-on-death

[iii] https://www.americanbar.org/groups/real_property_trust_estate/resources/estate-planning/probate-process/

[iv] https://www.ohiobar.org/public-resources/commonly-asked-law-questions-results/law-facts/law-facts-probate/

[v] https://smartasset.com/estate-planning/cost-of-probate

[vi] https://smartasset.com/estate-planning/cost-of-probate

[vii] https://trustandwill.com/learn/how-much-does-an-executor-get-paid

[viii] https://trustandwill.com/learn/how-much-does-an-executor-get-paid

[ix] https://carsonlaw.com/how-much-does-a-probate-attorney-cost/

[x] https://www.investopedia.com/terms/p/payableondeath.asp

[xi] https://www.investopedia.com/terms/t/transferondeath.asp

[xii] https://www.investopedia.com/terms/p/payableondeath.asp; https://www.investopedia.com/terms/t/transferondeath.asp