What happens after you had designated beneficiaries on your financial
accounts and you die? Especially if assigned to a person, but the
charity case might be nice to hear too.
Roths: Can they file to take possession tax free, probate free?
TradIRA: Can they file to take possession probate free, and then pay
tax or somehow keep it as an IRA?
NonRetirement: Surely this doesn't avoid probate or tax - does it work
the same as naming beneficiary in a will? I just see this option on an
online profile, but unexplained. thanks.
Beneficiary takes possession, no probate, account if left as
"beneficiary" account, properly titled, can be withdrawn over lifetime
of beneficiary. Spouse has option to transfer to her own Roth with no
RMD requirements. Non-spouse has a set of RMD rules to follow, can't
leave it untouched.
Again, if designated beneficiary was listed, same options as Roth,
Spouse can take in own name, non-spouse must start RMDs.
There are simple ways to avoid probate within reason, joint ownership
the simplest, but also tricky as stepped up basis issues make come into
play. If high enough worth, trusts can help avoid probate.
Joint ownership (JWROS) exposes asset to joint owner's creditors and
possible family court problems. TOD/POD does neither. But as JT
says, there are so many variables that "general" advice in this area
I am wondering about something. Is "avoiding probate" as important as
some attorneys make it sound? In the case of some simple estate, with
a home and money, say 1.5 mils, would the efforts to avoid probate
really pay off?
Disclaimer - I have not been involved in a probated estate.
This article suggests it can run as high as 3-7% and 3-6 months or
longer. Tough to put a 'cost' on the delay, as the assets can rise or
fall during that time, but even 3% is pretty bad when talking about cost.
The last trust I consulted on cost about $4000. Even 2% of a $250K
estate would cost $5000 to probate. So, I see value and 'neatness' in
using a trust to help keep one's affairs in order and legal/accounting
issues at a minimum at the end.
Igor Chudov writes:
As usual, the answer is "it depends". It depends first of all on the
state(s) involved. Some states make probate more difficult than others,
and some more expensive than others. Moreover, if someone has real
property in more than one state, then one estate may need to go through
probate in each jurisdiction. If you have real estate in multiple
states, you really don't want to do this.
Finally, there's a matter of timeliness. Probate doesn't happen
overnight. If there are assets which must be managed or liquidated,
it's a lot easier for the beneficiary of a TOD or JWROS owned asset, or
the trustee of a trust to immediately deal with the assets.
And a note to the original poster here (was it "dumbstruck?") -
NONE of this (at least up to and including *revocable* trusts)
avoids estate taxes. When the estate taxes are computed, the
value of the Roth IRA, the traditional IRA, items in a living
trust, etc. etc. all are included (and, depending on who the
beneficiary/inheritor is, then removed - things that go to the
spouse, charity, etc).
One important use for trusts, however, traditionally, has been
to maximize the use of the estate tax exemption. If a spouse
inherits everything, then the exemption which would have been
available to that first spouse do die was wasted and if the
estate was large enough, then when the second spouse died, the
ultimate estate got taxed more than it had really needed to
be taxed. This was hugely important when the exemption was
so much smaller.
In the recently passed estate tax "fix",
in theory, this need for a trust went away through the use of
a newly created "portability" of unused exemptions. So if,
say, a couple has $10million in assets, when the first one
dies and assuming the entirety goes to the surviving spouse,
when the second spouse dies, he or she would get to use both
$5 million exemptions. Without that provision, the first
spouse's $5 million exemption would have been wasted and there
would have been brutal estate taxes on the second spouse's
now $10 million estate.
That all said, I don't know of a single estate/trust attorney
nor financial planner or advisor who has all that much faith
in the portability thing. It only exists for these next two
years and who knows how or if it'll be honored in the future,
nor whether it'll be extended (in case one planned on it and
then goes and lives beyond those next two years). So trusts
for making best use of the exemption are not going away
any time soon. (They are called by many names including
exemption trusts, credit shelter trusts, bypass trusts or
even just "B" trusts).
Anyway, yes, probate can easily be avoided for most assets -
anything with assigned beneficiaries, for example. These
things do *not* avoid estate taxes, though, just probate.
And if you have real estate, especially expensive real
estate or real estate in a different state, at a minimum,
you might consider putting it into a living trust which is
generally quite inexpensive to set up - far cheaper than
probate in many places.
If beneficiaries can be assigned for any garden variety financial
account, that sounds very flexible. I wonder if I have this right, so
will pose an example not involving potential special cases of spouses
or retirement accounts.
Person A has a will donating everything (the residual?) to Charity B,
and a $100k brokerage account with beneficiary set to Charity C.
Charity C sees Person A has died and claims title of the brokerage
account by sending in a death certificate. But the account is frozen
until the estate is settled.
The estate is found to have $80k assets besides the brokerage, and
$40k obligations of bills and taxes. So I guess the obligations are
taken out from Charity B's slice of the pie leaving them $40k and
still $100k to Charity C?
Not that I wish to complain or micromanage the proportions - just see
how it may work. This sounds like a great way to adjust things easily
or frequently with less trouble than will adjustments.
Mixing percents and dollars gets dicey unless the dollars are small.
e.g. $10K to each of ten friends, the rest of a million dollar estate
split between wife/kid.
In case of the above (your example) you can choose wording to direct the
net amount after debts are cleared.
So long as the wording is unambiguous there will be no arguing. (ok,
someone will argue, but focus on 'unambiguous.')
That doesn't sound right - if the brokerage account is set to "Pay On
Death" to Charity C, then Charity C will probably be able to collect
the funds the same day that they present the death certificate. There
would be no reason to freeze the acount, as nobody else could have a
claim on it. At least, that was how it worked for me when a relative
Shouldn't the tax man have potential claim on it, as well as folks who
are owed money by the dead person? I don't get it; the only thing that
would seem ready to pass tax free is a Roth account. Apparently a
regular IRA too? But my question was about a nonretirement account,
which could be raided by either creditors, state tax, or fed tax.
Let's tweak the numbers with the same will donating all to Charity B,
and brokerage account donating all to Charity C. The will doesn't
mention the brokerage account or Charity C, so what is the relative
priority of beneficiaries C vs B?
brokerage= $100k, rest of estate= (-$50k), so CharityC= $50k and
... or would they get the reverse, or both get $25k?
brokerage= $100k, rest of estate= 0, so CharityC= $100k and CharityB0?
... or would they get the reverse, or both $50k?
"With either a transfer-on-deth or a payable-on-death account, you are
in control. The assets in the account pass directly to your named
beneficiary and bypass probate, the court proceeding that validates
your will after your death and transfers property to your heirs after
debts and taxes are paid."
Bo - I hope a professional with this specific experience will answer.
The people I've consulted with regarding trusts have no debt, but this
does raise serious concerns.
The article you cite implies that POD avoids creditors? If I had a
client with large unsecured debts, but assets that were simple (CDs,
stocks in brokerage accounts, etc) that POD passes those assets with no
regard for the debt owed?
Wow, this seems like a bizarre loophole. It looks like the TOD account
is still incurring state/fed estate taxes and taxes for capital gain
until time of death... but none of the tax money has to come out of
If other assets cannot cover taxes or creditor claims, it's just too
bad? If this is such a generous loophole in the death phase, it makes
me wonder if there is some downside to the TOD donor during their
The tax man has a claim on everyone and anything which got
proceeds from the estate.
And that would *include* the Roth account. Roth accounts pass to
beneficiaries such that there will be no *income* taxes due when
the beneficiary liquidates the Roth and spends the money. They
are not immune from *estate* taxes.
Of course, we are talking about pretty big estates if we're
worried about estate taxes and hopefully appropriate representation
has been hired (ie. attorney and accountant to help out executor and
make things clear to beneficiaries).
The will may state which thing amongst those that the will
directs will be the first hit for paying debts and taxes, but
if there isn't enough, assets transfered in other ways may
be tied up.
But the will may not, too.
Either way, it's up to the executor of the estate (who also
will file the estate tax return) to make sure that Uncle Sam
gets his cut before assets are distributed to others, but thing
which go to beneficiaries without the intervention of the
executor are still fair game if the IRS (or others owed by
the estate) pursue it. They cannot hit up beneficiaries
for anything *beyond* what they inherited, but the entire
inheritance is able to be pulled back, as far as I know.
The only things which would not be able to be sued for
are completed gifts to either individuals or irrevocable
trusts which took place before the death (and depending
on the circumstances, sometimes it has to be *years* before
Also, debts attached to specific assets (ie. a mortgage
on a house) go with the asset in question and are not settled
out of the general estate.
Anyway, most wills direct that all taxes and certain
debts be paid out of the residuary estate. Sample clause
(from a Nolo book):
I direct that all succession, estate, or inheritance
taxes which may be levied against my estate and/or against
any legacies and/or devises hereinafter set forth shall be
paid out of my residuary estate.
If that's the case, it makes everyone's life easier if
people make sure that there will be enough in there to
cover expected taxes. This is an area where folks who
expect to be hit with estate taxes need to plan carefully
and work with an attorney, an accountant and probably an
insurance guy to set things up right.
And it's an excellent reminder that folks should try
to not own insurance on themselves. If you have kids
and a substantial life insurance policy which will pay
out to them, and you are both the owner and the insured,
then the proceeds of the insurance payout - which go
directly to the kids - will be part of your taxable
estate. It may be better to have an ILIT own the policy
and maybe even have the payout go to the ILIT with provisions
explaining how you want the payout made.
The SEC has a TOD writeup that references this link which confirms the
intent to avoid probate
It seems so ripe for possibilities to defraud creditors, that I did a
google search into state rules that address this. I found a Michigan
example where a TOD could be declared invalid due to "fraudulent
conveyance", which maybe would cover the case if you created a TOD
account from an unsecured loan or when broke due to an underwater
It looks to me like TOD is a powerful tool if your financial account
allows it - I will ask about it's availability before opening new
I saw mention that TOD isn't the law in Texas or Louisiana, but if
your account is headquartered elsewhere it may not make a difference.
Also I saw mention that some states ignore your % numbers for multiple
beneficiaries and make them all equal. Otherwise I don't know how they
would handle some of the beneficiaries not surviving the donor,
without needing very complicated contingency tiers
I did some more research, and it appears that the following are the
If the decedent left a will, the will controls who & what pays the
If there was no will, state law controls who & what pays the estate
tax. Some states say only the estate pays, some say the POD
beneficiaries also pay.
If state law puts the entire obligation on the estate, the estate pays
the entire tax, if there are sufficient funds.
If state law puts the entire obligation on the estate, but there are
not sufficient funds, then federal law overrides state law and splits
the obligation between the estate and the POD beneficiares.
The state law can change at any time - for example, the Wisconsin
Supreme Court changed the Wisconsin law just last year. See
bo peep writes:
The only problem here is you are using the word "estate" as if
by itself it's unambiguous. It's not. There's the probate estate,
the taxable estate, the gross estate, etc.
The state law cannot override a federal obligation for estate
taxes. The IRS would likely go after the probate estate first,
as that's what's controlled by a single executor, but the IRS
can and has gone after anyone who received any part of the
gross estate - which means any POD or TOD beneficiaries or
even beneficiaries of life insurance policies which were
owned by the decedent.
(Which, I'll bring up one more time, is one of the reasons
that the owner of a policy should quite often not be the
insured but either a trust or the beneficiaries themselves.)
The article (which similarly doesn't distinguish between
"estate" and "probate estate" versus "gross estate" or
"taxable estate". It appears that everywhere they use the
word "estate" they mean "probate estate".
In particular, the dispute doesn't seem to be about whether
the gross estate is liable for the taxes but rather which
part of it - the probate estate or the POD beneficiaries -
is first in line being forced to pay those taxes. And as
you can see from the last sentence of the article, the end
result is that if the probate estate doesn't have enough
to pay the estate taxes, the federal government *will* go
after the POD beneficiaries.
In other words, POD doesn't avoid liability. But in certain
states, it does affect the *order* in which assets will be
hit up for that liability.
Yet another reason for folks to PLAN for this in their wills
by saying exactly who should be responsible (and since the
will cannot pull assets from the POD assets, the decedent
either needs to make sure he's got enough life insurance or
other assets controlled by the will to make that distinction -
or pass assets, even POD ones, to a trust which will distribute
the liability fairly).
The bottom line is that unless folks plan carefully, state law
can really screw up their plans as to who gets what.
Either way, though, the IRS is going to get their share...