By Stanley M. Vasiliadis

After his wife died, Frank, a retiree, updated his Will, Financial and Health Care Powers of Attorney, and Living Will. His Will directed that his estate, a large part of which included investments managed under a brokerage account, pass in equal shares to his three children. Frank, unbeknownst to his lawyer and on the advice of his financial planner, later designated the assets in his brokerage account as payable on death in equal shares to his three children. 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, the sister refused to oblige, and the two brothers 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 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, so Sam had already received his share. Consequently, most of his inheritance bypassed the trust and, as Mary had feared, was ultimately squandered, leaving Sam destitute and a burden to his siblings.

Time and again attorneys see carefully-crafted estate plans thwarted by clients who are advised to register their securities as “transferable on death” or “TOD.”  On the surface, this may seem like a good idea. Why not avoid tying up assets in probate by allowing them to pass directly to designated beneficiaries? Well, as illustrated above, this can have some very unpleasant, albeit unintended, consequences.

Three 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. But 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 popular misconception is 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. And 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.

So, stop before you TOD and contact a well-qualified attorney for advice regarding distribution of your estate. Vasiliadis & Associates would be happy to help.