Pay On Death Accounts: A Simple Solution?
For many people the process of estate planning has everything to do with implementing strategies that enable probate avoidance. Probate is the legal process that your estate must pass through before your heirs will receive their inheritances if you use a last will as your primary vehicle of asset transfer. Though probate does provide some protections, there are pitfalls involved with the process and many people prefer to look for ways to transfer assets to their loved ones in a direct and hassle-free manner.
What exactly are the pitfalls of probate? For one thing, probate is a public proceeding so it is a matter of public record; many people would prefer that their final affairs be resolved outside of the public eye. Plus, probate provides an open forum for people who may want to challenge the will and this is a door that many people would rather keep closed. Probate is also time-consuming, taking anywhere from several months to several years to run its course, and the heirs to the estate do not receive their full inheritances until the estate has been closed. And finally, probate can be expensive, consuming anywhere from 2% to perhaps as much as 5% of the overall value of the estate, and sometimes even more in complicated cases.
One very direct and straightforward way to transfer assets to your loved ones outside of the probate process is through the creation of pay on death accounts, sometimes known as transfer on death. You simply open one of these accounts at a bank or financial institution of your choosing, and when you do you name a beneficiary who will assume ownership of the funds in the account upon your death. Many brokerages also offer POD or TOD accounts. In addition to the ease of transfer outside of the probate process, pay on death accounts also provide flexibility. You have access to the funds throughout your life, and you are free to change the beneficiaries as you see fit or even close the account entirely at any time if this is what you would like to do.
However, TOD/POD has limitations and shortcomings, also, which is why so many people choose a funded, revocable living trust as the centerpiece of their estate plan.