Bank Accounts upon Death
Are payable on death accounts a simple way to pass assets to heirs or are they a mistake? It sure sounds simple. With a payable on death account or paid on death account, you name a beneficiary who gets the account when you die—no probate, no hassle. The person you name has no rights to the money until you die, so you can spend it all or change the beneficiary. When you die, the beneficiary simply needs to show the financial institution your death certificate and his or her identification, and the money is theirs. This works for bank accounts, certificates of deposit and even sizeable brokerage accounts, for example, with some stock brokers, you fill out a “Designated Beneficiary Plan Application.”
How can they go awry? If they contradict an estate plan that’s already in place. “It’s not that these accounts can’t or shouldn’t be used, it’s just they have to be coordinated carefully with the rest of the plan,” says Patrick Lannon, an estate lawyer with Bilzin Sumberg in Miami, Fla. “If there is more than one child and you make a paid on death account in favor of just one, it’s bound to cause misunderstanding,” he adds.
That’s what happened in the recent case of the Estate of Barbara Kester who died in 2011, with a will dividing up her property evenly among her five children. Separately, one daughter, Glenna Kester, took possession of a CD and a credit union account as payable on death beneficiary or joint account holder with right of survivorship. (Glenna also split an AIG annuity among herself and her two brothers per the beneficiary designation on the annuity).
The two sisters who were left out cried foul, but an appellate court ruled in favor of Glenna, concluding that there was no undue influence, and that she acted properly in divvying out the three assets per the beneficiary designations. (Note: an account titled with right of survivorship gives either named account holder the right to withdrawal the entire amount at any time).
“In general, these types of accounts have to be treated with caution because clients are often very informal, for example naming one child a beneficiary who is expected to further distribute the money in the account to other beneficiaries, but there’s no legal obligation to do so,” warns Lannon. “Other siblings may believe that was the intention, and it may or may not have been.”
Lannon had a client who insisted on opening separate accounts for her three kids and a bunch of grandchildren and when she died it turned out one grandchild had been mistakenly left out. “Even though all the beneficiaries were in agreement that it needed to be fixed, it was very awkward; we did disclaimers and gifts, but they were taxable gifts,” he says.
Another problem with payable on death accounts is that if almost all of the assets are payable on death and you have debts, taxes and expenses in the estate, it’s difficult for the executor topay these off, says Kimberly Stogner, an estate lawyer at Womble Carlyle in Winston-Salem, N.C. The executor would have to go through a proceeding with the clerk’s office to bring assets back into the estate.
So when do payable on death accounts make sense?
Lannon says a small payable on death account (your checking account, for example) can help make sure funds are available immediately for your executor or personal representative to pay for funeral expenses or other immediate cash needs during the estate administration period.
Stogner says she’s had clients use payable on death accounts for adult children or grandchildren—at the death of the first spouse. One way to do this is to set up separate CDs for each child or grandchild. Another way is to list the children or grandchildren as equal paid on death beneficiaries on a bank or brokerage account. (If you use the same broker, it’s a simple matter of moving securities from the deceased’s account to yours.)
Another example where payable on death accounts make sense is for a widow who has one beneficiary. If she leaves everything to her one daughter, for example, there will be expenses, but if the daughter is the sole beneficiary, she pays everything anyway.
If it’s two children and the accounts are split 50-50, that could work too. “It’s more complicated if there are more people getting different amounts; how would they divide up the expenses?” says Stogner. That’s when it gets awkward, and the risk of family discord is real. If there are any questions, we are more than happy to help clients in Craven and Carteret County including Morehead City, Beaufort and New Bern, North Carolina.