After his wife died Frank, a retiree, updated his estate planning. His new will passed his estate in equal shares to his three children. Most of his assets consisted of investments managed in a brokerage account. Frank, unbeknownst to his lawyer and on the advice of his financial planner, later designated the assets in his brokerage account as transferable on death (“TOD”) in equal shares to his three children. TOD assets pass directly to named beneficiaries and thus bypass one’s will. After Frank passed away and a decedent estate was opened, the executor, one of Frank’s children, did not have sufficient assets to meet all of the estate’s financial obligations. He had to ask his brother and sister to “loan” back to the estate part of the distributed brokerage account assets. Unfortunately, Frank’s daughter refused to oblige. The other two children had to step up and advance the money, causing friction and animosity among the children – a consequence neither Frank nor his money manager wanted or expected.
Mary, a widow, signed a will that provided for distribution of her estate to her children. But the share passing to one of her children, Sam, a spendthrift, was directed to pass into a support trust included in the will, to be managed and distributed for Sam’s benefit. After Mary died the lawyer administering her estate discovered that on the advice of her broker, Mary designated her investment account, which was a substantial part of her estate, to be payable on death directly to her children. Sam had already received his share. Consequently, most of his inheritance by-passed the trust and as Mary had feared, was ultimately squandered, leaving Sam destitute and a burden on his siblings.
Time and again we see carefully-crafted estate plans thwarted by clients who follow the misguided advice of their financial planners to register their securities as “transferable on death”, “TOD”. On the surface, this may seem like a good idea. Why not, one may ask, avoid tying up assets in probate by allowing them to pass directly to designated beneficiaries? As illustrated above, this can have some unintended unpleasant consequences. Here are some reasons why not to register securities as TOD.
LIQUIDITY – CASH TO MEET ESTATE OBLIGATIONS. – An executor, upon assuming responsibility, must pay last debts, funeral and burial costs, and continuing financial obligations, for example costs and expenses of maintaining the decedent’s home pending sale or distribution. These costs are deductible against the Pennsylvania inheritance tax. An executor typically makes these expenditures, files the inheritance tax return, and pays the tax on behalf of all the beneficiaries so that they receive their inheritance without further obligation. Paying the tax early will generate a 5% reduction in the tax. All of this requires cash – which will not be available if liquid assets fly away via TOD.
NO TAX BENEFITS. Contrary to what some may believe, TOD assets do not pass free of death taxes, State and Federal. In fact, the burden on TOD beneficiaries is greater since they must individually arrange for payment of the tax.
ATTORNEY FEES. Another misconception holds that attorney fees are lower if assets pass via TOD rather than as part of the decedent estate administered by the executor. Wrong. On the contrary, problems that arise because of disruption of an intended estate plan or lack of liquidity create more work for an attorney and greater cost to the estate. Moreover, as noted earlier, TOD assets often substantially impact an executor’s responsibilities, for example, preparation and filing of State and Federal death tax returns and State and Federal income tax returns for the estate, and can complicate the tax returns of TOD beneficiaries.
Seek advice regarding distribution of your estate from a qualified attorney. The lawyers at Vasiliadis Pappas Associates are available and happy to help you with your estate and long-term care planning.