An often overlooked (but extremely critical) aspect of Estate planning include account titling and beneficiary designations. These control who receives the account, regardless of what the Will or Trust states!
Joint tenancy accounts with rights of survivorship and Payable on Death (POD) or Transferrable on Death (TOD) accounts are popular. These forms of ownership can be used with a variety of assets, including brokerage, checking, savings, and time deposit accounts. However, there can be some misunderstanding as to what happens to joint tenancy and POD/TOD accounts after an owner’s death. Joint and POD/TOD accounts can lead to the distribution of assets to your heirs in an unintended manner.
The public’s perception is that these types of accounts “avoid probate” at the owner’s death. Unfortunately, the true meaning of the term “avoid probate” can be the source of some confusion. It is true that joint tenancy and POD/TOD accounts do not get paid to your Estate at death, and therefore are not disposed of according to the terms of your Will. Instead, the account goes directly to the surviving joint owner, or in the case of a POD/TOD account, the named beneficiary or beneficiaries.
However, joint tenancy and POD/TOD accounts are not entirely excluded from your gross taxable Estate at death. Also, if formal probate occurs, joint and POD accounts are listed on your probate inventory and some or all of the value of such accounts may be included when calculating Attorney fees or Executor fees. POD/TOD accounts are also subject to Iowa Inheritance Tax and/or Federal Estate Tax depending upon who receives the asset and the size of your gross Estate.
Joint accounts are generally most appropriate for married couples. For a husband and wife, probate may not be required at the first spouse’s death if all assets are held in joint tenancy. Joint accounts can serve as a “safety net” immediately available to the surviving spouse; where money will be needed to pay funeral expenses or ongoing living expenses of the surviving spouse until life insurance proceeds are received or retirement accounts transferred.
Creating a joint account with someone other than a spouse should be done with caution. The assets of a joint account can be withdrawn at any time by any of the joint tenants regardless of who contributed the money. In addition, all of the funds held in a joint account may be subject to the claims of creditors of any of the joint tenants. Finally, joint accounts with someone other than your spouse can potentially create Federal Gift Tax liabilities. An alternative to a joint account is adding a signer to the account. This person may access the account but all assets are considered the primary account holder’s only.
There are potential pitfalls with POD/TOD accounts as well. Holding all of your financial assets in POD/TOD form can leave your Estate with a cash shortage. At death, your personal representative will need money to pay final debts, taxes and the ongoing expenses to maintain Estate property during administration (e.g. property taxes, utilities, and insurance). Care must be taken to ensure you leave your Estate with sufficient cash to pay final debts and administration expenses.
The Hills Bank Trust and Wealth Management Group has Officers in both Johnson and Linn Counties. We invite you to schedule a meeting with one of our experienced Trust and Wealth Management Officers by calling 1-800-899-8858 or visitng us online at HillsBankWealthManagement.com. We look forward to serving you as your trusted advisor.
Consult with your Estate Planning Attorney before converting existing assets to joint tenancy or adding a POD/TOD to an account. Failure to do so may affect your intended Estate Plan.This post is for information purposes only and should not be interpreted as providing legal advice. You should consult an Estate Planning Attorney before executing any legal documents. Investment products are not a deposit, not FDIC insured, not insured by any government agency, carry no bank guarantee, and may go down in value.
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