TOD, POD, JTWROS…….OMG, WTH??(3 things to know about passing assets outside of a will.)

“Whatever you do, set your estate plan up so that you can AVOID PROBATE at all costs!!”  I hear this a lot, and it’s often said with such conviction that I wonder if the person saying it thinks that if an estate has to go through probate, the deceased person will go to hell when they die as some sort of punishment for not taking care of business.

Yes, in some states it is very beneficial to avoid the court process by which your will is declared a valid legal instrument… otherwise known as “probate.”  It can, in fact, be time-consuming and expensive to deal with the legal process.  But in some states, like Texas, if you have a well-drafted will, the probate process does not have to be a huge time suck or bank breaker.  

That said, even in Texas, we sometimes look to cause certain assets to pass outside of the will so that a family member or friend can have immediate access to some funds upon the owner’s death.  Probating a will takes some time, and it’s nice to have immediate access to cash to pay for things like funeral expenses and utilities until the rest of the assets can be freed up.

1. What does passing assets outside of probate really mean?

Putting a beneficiary designation on an account or piece of property is like doing a baby will for that individual asset.  So it’s really important to coordinate your will with the beneficiary designations of your various accounts.  You don’t want them to contradict each other, but if they do, the beneficiary designation will override the will.

2. What are the most common types of beneficiary designations?

a) Pay on Death (POD) Accounts

• POD accounts can be set up for checking, savings, money market, and certificate of deposit accounts, as well as U.S. savings bonds. The money remaining in the POD account will then be paid to the beneficiary(ies) named by the account owner in the beneficiary designation form on file with the bank.

b) Transfer on Death (TOD) Accounts

• TOD designations have the same effect as POD designations, but TOD is what you call it when naming a beneficiary of a brokerage or investment account (rather than a checking or savings account).  It’s just a vernacular thing.

c) Joint Tenants With Right of Survivorship (JTWROS)

• JTWROS designations are usually found on assets like real estate deeds and car titles.  It’s a type of ownership in which two or more joint owners have equal portions of ownership that are immediately allocated to the remaining owners if one owner dies.

d) Transfer on Death Deed (TODD)

• I like to explain these types of tools as deeds that sit on top of the Warranty Deed that originally gave you title to your real estate and designate the person(s) who should inherit your house when you die.  Just like all of the beneficiary designations described above, these tools are revocable during your lifetime.

3. So what do I need to remember about all of this?

The takeaway is two-fold.  First, using TOD, POD, JTWROS, and TODDs can seem really sexy.  (Look, people, there’s not much seduction in the world of probate, so we must insert the sizzle where we can.) The prospect of passing assets without estate planning documents, executors, courts, and lawyers may sound like a dream.  But these designations need to be used with caution because while they can in fact provide instant liquidity and ownership to the designated individual, sometimes they cause your estate plan to get out of kilter if not carefully tended to.  Sometimes, well-meaning bank associates pre-check the POD box on a person’s account, thereby giving one child total ownership of those assets when in reality the person just wanted them to have signing authority on the account.  The other 3 kids may be scratching their heads one day as to why that one child just inherited a $250K investment account.

Second, no matter what, you still need a will.  Besides the fact that it is very difficult to coordinate 100% of your assets via beneficiary designations, there’s inevitably a need for the court appointment of an Executor to handle things like filing your last income tax return, creating a trust for minor beneficiaries, and–for all you high net worth folks out there–doing some estate tax planning.