Avoiding Probate with a Payable on Death Account

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 What Is Probate?

Probate refers to the legal procedures which govern the distribution of a decedent’s estate. Another way to put it is that probate is the formal court process in which a person’s things are distributed when they die, either according to their will or according to state law when there is no will.

The probate process is generally handled by the local probate court, which is responsible for overseeing all related probate matters, such as:

  • Establishing that a will is legally sound and valid;
  • Assigning and/or ensuring that there is an executor to manage the estate; and
  • Ensuring that estate assets are properly distributed to the correct beneficiaries.

It is important to note that the probate process can vary widely from state to state. Generally speaking, the probate process is as follows:

  • If the decedent had a will, the will usually names an individual to become the executor; or, the administrator of the estate. If there is no will, or if the will does not name someone to become executor, the probate court itself will assign someone to the role;
  • The appointed executor or administrator of the estate begins the process of managing the estate by filing documents with the court in order to schedule and set the date of the probate hearing;
  • At this probate hearing, the court will review whether the will is valid. Depending on both the state and the court’s decision, the probate procedure will vary from this point on;
  • The executor will ensure that all debts and/or taxes that are still owed by the estate are paid off and settled; and
  • Any remaining estate assets, or items prescribed in the will, will be distributed to the appropriate beneficiaries. As previously mentioned, if no will exists, assets will be distributed in accordance with state law.

To reiterate, this is an extremely basic outline of what is necessary for the probate process. These steps can and will vary greatly depending on state laws, local rules governing probate procedures, and other variables relating to the actual estate itself such as size, value, etc.
Additionally, not all states require probate; and, many of them have their own laws to dictate when it is necessary to probate an estate.

The most important factor to remember about probate is that its main purpose is to settle an estate. An example of this would be how aside from validating a will and ensuring creditors are paid off, it can be used to:

  • Resolve disputes over assets;
  • Determine where property or assets should go if it is not specified in the will; and
  • Determine whether there are any ancillary probate matters that must be completed for property that is located in other states.

Are There Any Alternatives To The Probate Process?

There are many reasons why people may wish to avoid the probate process, as there are many pros and cons associated with the matter. Probate can be costly and take a considerable amount of time to conclude. As such, there are some alternatives to the probate process for those who qualify.

Best case scenario, avoiding the costs and fees associated with probate would involve having a valid and updated will in place when you die. This will provide the court with specific instructions regarding how you wish for your property to be managed and distributed. While this is not exactly an “alternative” to probate, it is the standard or ideal way in which a person’s estate should be managed upon their death and can reduce the likelihood of problems associated with probate.

There are some other financial instruments that could be considered alternatives to the probate process. These are financial tools that allow property to be passed to beneficiaries upon the person’s death, without the property being required to go through the probate process. One such financial instrument is a “payable on death” account.

What Is A Payable On Death Account? What Are The Advantages Of A Payable On Death Account?

One of the ways in which to avoid the costs and inconveniences associated with probate is to set up a “payable on death” bank account, or “POD account”. These are also referred to by other names, such as “Totten trusts“, and can be opened at most banks, brokerage houses, credit unions, and other financial institutions.

Banks that offer POD accounts will generally provide a “beneficiary designation” form. This form allows the account owner to name anyone who will receive the account’s contents when the account owner dies. The money that is contained in the bank account will pass automatically to the beneficiary, or beneficiaries, upon the death of the account owner. Under this arrangement, there is no need for the probate court to investigate to whom this money should go.

Generally speaking, only the following parties can be named as beneficiaries of a payable on death account:

  • Spouses;
  • Children;
  • Grandchildren;
  • Parents; and
  • Siblings.

However, this may depend on various factors, such as state laws as well as the policies of the individual bank or financial institution in charge of the POD account. If you have any questions regarding the way POD accounts are treated in your locality, you may need to consult with an attorney in addition to speaking with the institution who is in charge of the account.

There are many notable advantages of a payable on death account over other probate-avoidance accounts, such as jointly owned accounts and trusts which will be further discussed below. An example of this would be how in a joint bank account, a child’s creditors can sometimes get access to the parent’s money. In contrast, a POD account remains the parent’s property until death. Additionally, in a POD account, beneficiaries can be changed or removed. Finally, the money kept in the account can be spent at any time.

Trusts are also useful tools for avoiding probate fees. However, trusts can often involve accountant’s fees and attorney costs. On the other hand, with POD accounts, these costs can generally be avoided. However, it is imperative to note that POD accounts are still considered to be part of the estate for both inheritance and gift tax purposes.

What Are Some Other Ways In Which To Avoid Probate?

As previously mentioned, there are various other financial tools and instruments that you can use to avoid probate which may include joint bank accounts and trusts.

Joint bank accounts can allow the account funds to transfer immediately to the other account owners when one of the joint owners dies. The account funds simply pass to the other owner, or owners, without the need for the funds to pass through the probate court system.

Some types of trusts, such as revocable living trusts, allow a person to transfer property to a named beneficiary. An example of this would be how they might create a trust that transfers specific property to a specific beneficiary at a specific time, or when certain conditions are met, such as the beneficiary turning 18.

The best type of instrument that you should use to transfer property outside of the probate process will differ according to your exact goals and intentions. An example of this would be how a joint bank account might accomplish your estate goals, while in other contexts, a POD account might be more suitable given your specific estate.

Do I Need An Attorney For Assistance With A Payable On Death Account?

When you are estate planning, and are considering setting up a payable on death account, you should consult with an experienced and local estate lawyer. An attorney can also help you determine your best options according to your state’s specific laws regarding the matter, and will also be able to represent you in court, as needed, should any disputes arise.

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