Amateur Efforts to Avoid Probate Can Be Disastrous

Since 1997 Pennsylvania law has permitted the registration of securities in “POD” or “TOD” form. POD means “pay on death” and TOD means “transfer on death.” Titling accounts POD or TOD permits the naming of a beneficiary on all sorts of investments. In the past only life insurance and pension plans had this option available.

Unfortunately, all sorts of tellers, clerks, customer service representatives, brokers, account managers, and other employees of financial institutions are giving customers advice about how to title accounts. This wreaks havoc with many estate plans and causes untold problems. You wouldn’t think of letting one of these people write your will – why would you let them prepare beneficiary designations?

Here is an example, provided by one of my colleagues, of what can go wrong:

Son, who is the Co-executor of Mom’s will, comes to me for help. A so-called “expert” told Mom that she could avoid probate by changing the title on her brokerage account to read POD (pay on death) to Son, Baby Brother, Sister One, and 3 nephews (sons of deceased Sister Two). Count ’em – that’s six beneficiaries. The only asset in the account is one large bond. Mom passed away.

The broker says he cannot divide the large bond 6 ways and he needs everyone to agree
that it should be sold so that he can give cash to the beneficiaries. He can’t distribute pieces of the bond. Son is not on good terms with Baby Brother who wants Son to pay for the lost value in the bond (interest rates went up since Mom died) and blames Son that nothing has been done in the three months since Mom passed away. Son is executor but since this account is not probate property, the Executor has no authority over it, so it really is not Son’s responsibility. (But tell that to Baby Brother.) Sister One is not speaking to any of her co-owners because she says the 3 nephews (who are getting half of the account, one-sixth each) are getting more than their share. Sister One says that the nephews should only receive the one-fourth share that would have been Sister Two’s if she lived. After all, that’s what Mom’s will says. Of course, the will doesn’t operate on the POD account thanks to the advice of the “expert.”

The accountant says that since Mom died last year, the sale proceeds should not be reported to Mom’s social security number. That makes sense, but not one of the 6 named beneficiaries is willing to have the entire sale proceeds reported to them on a 1099-B; and the broker can only use one social security number for the transaction. Mom’s lawyer, who is the other Co-Executor, is angry because the plan he designed is messed up, and it looks like the 6 beneficiaries of the brokerage account are going to have to be treated as a partnership comprised of the 6 beneficiaries for income tax purposes. The partnership’s tax ID number then can be used for the 1099 instead of any one of the 6 beneficiaries. That will require a tax I.D. number, a partnership agreement, and federal and state partnership income tax returns – all very costly, time-consuming and unnecessary. Since some of the beneficiaries are unhappy and hostile to each other, getting them to understand and cooperate looks like many hours of legal work.

The three nephews are begging for money. Since their mother died, they are in need of money to pay college tuition. They can’t get financial aid because they have an asset that they must spend first. Each owns 1/6 of the brokerage account. One of them is under 18, and the brokerage house will not pay out anything to the minor nephew unless a legal guardian is appointed for them. Ironically, the probate proceeding required for guardianship is much more onerous and expensive than probate of a will.

Mom’s will was so simple, she gave everything to her issue per stirpes. If the brokerage account had not been POD or TOD, it would have passed under Mom’s will. The 3 nephews would have shared their deceased mother’s one-fourth share. The Executors would have authority to sell the bond. Any income tax consequence would be reported and paid handled by the estate. The nephew could have received distribution for tuition. The payment could have been made to the college or to a custodian for the benefit of the minor. No partnership would have to be created, and no partnership income tax returns filed.

The will would have worked beautifully. All of the decedent’s and the beneficiaries’ goals and needs would have been met. Yes, the POD registration avoided probate, but it created a host of other problems.

When you register an account or an investment in POD or TOD form, you are making your will irrelevant to the disposition of that asset. A dispositive scheme that is carefully thought out and designed is abandoned so that you can “avoid probate.”

Probate is the proceeding used to determine the next owner of property titled in the decedent’s name alone. The will become the document that governs who gets what and an executor is appointed to administer the estate. The evils of probate are largely imaginary. Seminar hucksters try to drum up business for living trust mills by painting probate as worse than death. Sometimes it is beneficial to use trusts, and there can be good reasons to avoid probate, but for most people, it is not a concern.

Certainly, for Mom in our example, avoiding probate caused many, many problems. The so-called “expert” who advised her really did not have any knowledge, training or experience in estate settlement and the various property law and tax issues involved.

New Account Forms at investment institutions now routinely ask you to name a beneficiary. Do not feel that you have to name a beneficiary. In most cases you’re better off leaving that section of the form blank. When the clerk wants you to fill it in, say, “No, thank you. I have a carefully thought out will and estate plan which I intend to use to dispose of my assets.”

Remember that how your assets are titled is an important part of your estate plan. The will and any trust you have are designed to work with your assets as they are titled when you made the plan. If you change the title to assets, you are changing the estate plan and often bringing about unintended and inequitable results. Don’t change titles or name beneficiaries without reviewing your estate plan with a qualified professional. You could be changing more than you think.