Saturday, May 25, 2024

August 2008 Legal Briefs

  1. Motor Vehicle Lien Entry Forms Are Changing
  2. New Statute Allows “Transfer on Death” for Real Estate

1. Motor Vehicle Lien Entry Forms Are Changing

The Motor Vehicle Division of the Oklahoma Tax Commission (OTC) has developed a new online lien entry form (Form MV-21A) for vehicles, manufactured homes, boats and outboard motors.  This form can be downloaded from the OTC web page, filled out at your computer, and printed off for filing with either your local tag agent or the OTC.

To download the new form, go to www.tax.ok.gov/mv2.html and click on a line in the text about half-way down the page (in blue) which says “download the MV-21A here.” After completing this form on your computer, you must file four identical copies of the completed lien entry form with the tag agent or OTC.

Between now and January 1, 2009, a lender has the option of using either (1) the new online Form MV 21-A, or (2) the old familiar six-part Form MV-21 which has different-colored pages and carbons between each page.  However, beginning January 1, 2009, the OTC will no longer accept the old six-part Form MV-21 for lien entry.  Banks need to start transitioning to the new form, but can continue to use their existing supplies of old forms for the next several months, if they prefer.

Note that even after January 1, 2009, the OTC will continue to accept the old lien release form, which is one of the colored pages of the old six-part Form MV-21.  There isn’t any online lien-release form, but OTC instructions indicate that when one of the new lien entry forms is filed, a “lien release receipt” will be provided to the lien filer, for use in terminating the lien at the appropriate time.  Alternatively, a lender can type a release by using the correct page from a blank copy of the old six-part form, even if the lien was not entered by using that form, and even after that form has become outdated for use in filing a new lien entry.

The OTC describes the new online form as “convenient” and “user-friendly.”    Many people dislike using the old six-part form, both (1) because it is necessary to use a typewriter to fill it out, and (2) because mistakes in typing are difficult or impossible to correct on the “carbon” copies.  If someone accidentally mistyped the VIN number or the vehicle owner’s name, it was really important to correct the information, but sometimes the only way to do so was to start over.

Of course, if someone wants to use a typewriter to complete the new forms, that’s easy to do by first printing off the online form in blank. 

Suppliers of electronic banking forms will probably develop their own equivalent of the lien entry, Form MV-21A, for filing with the local tag agent of OTC.  The OTC instructions specifically permit this:  “Any lien entry form which follows our template and which includes all listed information will be acceptable.”  However, the OTC warns that “non-complying forms will be rejected.”

2. New Statute Allows “Transfer on Death” for Real Estate

The Oklahoma Legislature has enacted House Bill 2639, the “Nontestamentary Transfer of Property Act,” effective November 1, 2008.  This bill creates a “transfer on death” procedure for real estate that operates very much like the “payable on death” (POD) provision for deposits.  The new provisions are codified in Title 58, Oklahoma Statutes, Sections 1251 through 1258. 

I will discuss the new transfer provisions for real estate, while also making comparisons to various features of Oklahoma’s previously existing (1) “payable on death” provision for deposits, and (2) “transfer on death” provision for stock certificates and other securities. 

Banks need to be aware of the full range of these “beneficiary” statutes, which can affect both the lending side (real estate or securities as collateral) and the deposit side.

1. Avoiding Probate

Probate of an estate is often (but not always) necessary, and accomplishes several purposes: (1) to “probe into” the validity of a will (if any); and also (2) to examine and approve creditors’ claims against the estate;  (3) to determine who the heirs are (under a will, or based on statutes if there is no will); and (4) to order the remaining assets to be distributed to heirs, after liabilities of the estate are paid or otherwise provided for.  The judge’s “order of final distribution” is also an order transferring any property that was titled in the deceased’s name at death, into some heir’s name, assuming that title to the property has not otherwise passed by joint tenancy or other beneficiary arrangement, and further assuming that the property was not sold by the personal representative to pay claims, or to convert the assets into cash.

Many types of property are “titled” (required to be listed in a specific person’s name on records somewhere—for example, deposit accounts, stocks, vehicles, and real estate); and other types of property are “untitled” (such as household goods, furniture, cash on hand, and other personal belongings).

Without regard to paying the deceased’s liabilities, or determining who are the correct heirs, the fact that there are “titled” assets standing in the deceased’s name at death, without any joint tenancy or other beneficiary provision in place, almost certainly will require a probate proceeding to be started.

(There may be no other way, apart from probate, to transfer the “titled” property out of the deceased’s name.  There are some minor exceptions—for example, the provision in Section 906 of the Banking Code, allowing deposits of up to $5,000, standing in the deceased’s sole name with no beneficiary, to be transferred based on an affidavit of heirs, if the deceased had no will.  There is no comparable provision for real estate, however.)

2. Transferring “Titled” Property

There are three ways that “titled” property of any kind can be transferred from an individual who has died, to someone else, without a probate proceeding in which the judge would order the transfer of those assets.

One possible approach to avoiding probate is to put all “titled” assets into joint tenancy.  Oklahoma allows this for stocks and securities accounts; for vehicles, manufactured homes, and other items of personal property having a certificate of title; and for deposit accounts.  Oklahoma also allows individuals to set up a “joint tenancy with right of survivorship” with respect to real estate (Title 58, Oklahoma Statutes, Section 912).

However, as many bankers realize from working with deposit accounts, in some situations an owner is comfortable placing assets in “joint tenancy,” but in other cases that person has good reasons (some of which are listed below) for not making his intended heirs into immediate co-owners. 

A second way of transferring “titled” assets at death (and also non-titled assets) is to put them into a living (revocable) trust.  When vehicles, stocks, bank deposits, and real estate are all held in the name of a trust, there hopefully will be no asset left that requires a judge’s order to transfer, at death.  After everything is held by the trust, and a successor trustee is in line to act for the trust, it’s easy to transfer all assets from the deceased’s control to the heirs’ control.

It’s now quite common for any older person who owns a home to have a living trust.  Still, a lot of people don’t have a trust, for a variety of reasons:  (1) Some say they “don’t believe in trusts”; (2) many people in their 30’s, 40’s, and even 50’s simply haven’t gotten around to either a will or a trust—maybe because they’re not ready to think about their own mortality,  or they want to wait to see how their various heirs’ circumstances will develop; and (3) others believe a trust is “too complicated for their situation” or “not worth it.”

A third way of transferring “titled” property at death (without probate or a trust) is to place “beneficiary” provisions in the title of those assets.  Any such “beneficiary” provision is a state-authorized exception to the general rule that assets held in the owner’s name at death will go through probate.  Therefore, any statutory “beneficiary” provision must strictly comply with the procedures and limitations set out in state law.  

This third approach (beneficiary provisions effective at death, for “titled” assets) is almost always better than no estate planning at all.  It’s a “get by for now” approach for someone who hasn’t done a will or trust yet (and perhaps isn’t planning to do one soon).  It also appeals to a person who thinks he really doesn’t need anything more complicated than this.

3. Various Beneficiary Statutes

I will briefly discuss Oklahoma’s other existing “beneficiary” statutes (apart from the new one for real estate):

Under already-existing Oklahoma statutes, it’s permitted to place a “payable on death” (or POD) beneficiary on deposit accounts (Section 901(B) of the Banking Code), resulting in the funds being automatically payable to the beneficiary at the owner’s death, without passing through an estate.  Of course, for deposit accounts the only permitted beneficiaries are (1) individuals, (2) trusts, and (3) IRS-recognized charitable organizations.  (The deposit account remains as security for any debt on which those deposits are pledged as collateral, and only the remainder is transferred to beneficiaries.  However, there is no “hold-back” provision that would void or reduce the transfer if there are insufficient other assets in the estate to pay the other debts of the deceased (not secured by the deposits), or taxes, or costs of administration of the estate.)  No provision contained in a will or trust can affect the operation of a POD provision with respect to deposits.  If the beneficiary dies before the owner of the deposits, the deposits will not go back into the owner’s estate, but generally will be payable to the beneficiary’s estate.

Similarly, as provided in the “Oklahoma Uniform TOD Security Registration Act (Title 71, Oklahoma Statutes, beginning at Section 901), in the case of stocks and bonds, other securities, and brokerage accounts, someone can place a “transfer on death” (or “TOD”) provision on the ownership “title” (but only if the entity registering the security will consent to this designation), and this language will cause the security to be transferred at death to a named beneficiary or beneficiaries.  (If there is more than one owner of the security or account—as joint tenants–the beneficiary provision is still permissible, but takes effect only upon the death of the last owner.)  A will can be used to cancel a “transfer on death” designation on securities, but will not be binding on a registration entity that has not received written notice of the cancellation.

With regard to vehicles, manufactured homes, and other items of personal property that have an Oklahoma certificate of title, there is no provision allowing for a “beneficiary on death,” but there is a standard procedure that gets to the same place.  During lifetime the vehicle can be titled in the name of joint owners with “or” between the names.  The effect of this is that either owner acting alone (without both acting together) can transfer or change title to the vehicle at any time.  It’s not the case that sole title belongs to the other owner after one joint owner dies; but either the estate of the deceased owner, or the remaining (living) owner, acting alone, can transfer title. So the remaining owner has an easy way of transferring title into his sole name, or selling the vehicle, without need for probate, if title is held in this way.

To summarize, in going through the types of “titled” assets of all kinds that might be held by a deceased person prior to death, real estate is the only major category that (until now) has lacked any method of direct transfer to a beneficiary at death, to avoid probate—if we exclude a joint tenancy that would also make the other person a current owner during lifetime.  

It’s not surprising that the Legislature enacted the new transfer-on-death procedure for real estate, because a home is often the major asset that an individual owns at his death.  By taking full advantage of the ability to transfer real estate by means of a beneficiary provision, and also using (as applicable) the other provisions mentioned above for transferring deposit accounts, stock, and “certificate of title” property, many individuals could completely avoid having a will, a trust, or probate.  (I’m saying it’s possible, but I’m not saying that it’s a good choice in all circumstances.  Certainly for people who would never have a will or trust prepared anyway, this is an important change.)

The Legislature has been steadily raising the dollar size below which an estate will owe no Oklahoma estate tax—and effective January 1, 2010, the estate tax in Oklahoma is completely repealed.  (That date will also represent the end of required reporting of a deceased’s deposit accounts to the Tax Commission.)  With no tax-collection motive remaining, the State of Oklahoma will soon have no particular “stake” in making sure that assets of estates are reviewed in any way by a probate court—and court dockets are already too crowded with other matters.

 But now that “even the house” can be transferred by a beneficiary provision without going through an estate, general creditors may find themselves short-changed in some cases.   As discussed later, this can occur if there are not sufficient other assets remaining in an estate (apart from assets transferred by beneficiary provisions) to pay claims against the estate.  Recorded liens and mortgages will follow transferred assets—with no problem—but unsecured creditors might discover that the deceased’s “net worth” has evaporated through beneficiary provisions, without going into the estate. 

4. Joint Tenancy–Pros and Cons

Anyone considering either “joint tenancy” or “beneficiary on death” provisions to avoid probate should understand how one choice or the other may be more appropriate in light of the particular “heirs” and their circumstances.  A new accounts person at a bank is probably aware of these issues, as a result of helping depositors to set up joint tenancies or POD beneficiaries on deposit accounts. 

A real estate joint tenancy between husband and wife (or a joint tenancy on deposit accounts or securities accounts) is extremely common, and what most couples want.  Technically it would be just as possible to set up a joint tenancy between a surviving parent and an adult child, or between an older person and any other person—but a trust is used much more frequently than joint tenancy as a means of transferring ownership of property in non-spouse situations.  Generally, if the intended beneficiary of the owner’s assets is less closely related than a child, joint tenancy is not used as a means of transferring title.

The new transfer-on-death deed is a practical choice for transferring assets to children, and even more likely to be used if the beneficiary is not a spouse or child, and therefore someone who the owner probably would not want to have any current ownership or control over the property.  The new provisions will also work as a means of transferring real estate at death to any kind of business entity, trust, or charity.

Surrounding circumstances in the particular case can make a difference, so real property owners need to weigh the following issues before putting real estate in joint tenancy.  These issues might (or might not) influence someone to use a transfer-on-death deed instead of joint tenancy:  (1) A joint tenant immediately becomes a partial owner, with equal rights.  (2) A joint tenancy cannot be reversed unless the other joint tenant also agrees to do so.  (3) If the person who transferred the real property into joint ownership later wants to sell the property, he can do so only if the other joint tenant consents–and he will no longer be legally entitled to the full sale proceeds. (4) If the person placing property into joint ownership later wants to mortgage the property to obtain funds, he cannot do so unless the other joint tenant joins in the mortgage.  (5) If the other person (for example, an adult child) has money-management problems or “creditor issues,” giving that person joint ownership of real estate (too soon) could put the property at risk from judgment liens, income tax liens (state and federal), or child support levies. (6) If the other person is likely to need nursing home care in the future, putting too many assets into the other person’s name (too soon) could work against the possible goal of obtaining nursing-home assistance from the state for that person at a future time.

5. TOD Deed–Basic Provisions

New Section 1252 of Title 58 lays out some of the requirements for executing and recording a transfer-on death (TOD) deed:  “An interest in real estate may be titled in transfer-on-death form by recording a deed, signed by the record owner of the interest, designating a grantee beneficiary or beneficiaries of the interest.   The deed shall transfer ownership of the interest upon the death of the owner.” 

This language makes several points:  (1) Any type of interest in real estate can be transferred by such a deed—for example, the entire real estate, the surface only, the minerals only, or an easement across property, to the same extent that an ordinary deed can transfer full or partial rights in real estate. (2) One beneficiary can be named in a TOD deed, or more than one.  (3) The beneficiary can be any individual or any entity capable of holding title to real property (including a corporation, trust, partnership, or LLC). (4) The person executing the deed must have “record” title–meaning that the deed records show the person who is executing the deed as owner of the property interest being transferred.  

6. Time of Filing Deed

Section 1253 requires that the transfer-on-death deed be filed in the local county “prior to the death of the owner.”  (Waiting too long to file–until after the owner’s death–will make a transfer-on-death deed totally without effect.)    

The “file before death” requirement is extremely useful to lenders:  If the lender obtains an abstract or a title opinion for a parcel of real estate while the owner is alive, and no transfer-on-death deed is on file, the fact that such a deed may exist somewhere (not yet filed) is irrelevant:  The owner can still mortgage the property freely during lifetime, and the beneficiary will take the property subject to the mortgage.  (Section 1255(B).)  On the other hand, if an owner has died and no transfer-on-death deed is on file yet, none can be filed after that time (whether one exists or not).  In this situation, the lender can rely that the property belongs to the owner’s estate, not to an as-yet-unknown beneficiary of a TOD deed.

7. Execution of Deed

The owner must personally sign the transfer-on-death deed, with an acknowledgment by a notary.  Two witnesses must swear that they saw the owner sign, that he understood it, and that it was his intention to sign. There also must be a statement that the person signing it is “of competent mind and having the legal capacity to execute this document.”  

These requirements, including the signature of two witnesses, are closely equivalent to the Oklahoma procedure for executing a will—and appropriately so, because the transfer-on-death deed is used to convey what may be a major asset (real estate), at the owner’s death, instead of using a probate proceeding that would establish validity of a will and transfer property as provided by that will.)
 
8. Special Deed Form Required

Just as a “joint tenancy warranty deed” is a special type of deed available from office supply companies, the suppliers of real estate forms will need to create a specific form to use for transfer-on-death deeds.  Section 1253 sets out some lengthy disclosures and provisions for witnesses that are required to be contained in such a deed, and are unique to this type of deed.  (A lawyer could prepare a deed from scratch (without a form), but the average person will need a specific TOD deed form, to be sure of getting the requirements right.)

9.  Joint Tenancy Plus TOD

Section 1256 allows any person holding record title to property as a “joint tenant with right of survivorship” also to execute and file a transfer-on-death deed, even while all of the joint tenants remain living. 

This TOD deed will have no effect on the real estate interest when the first joint tenant dies.  Instead, the “joint tenancy” provision that is already in place will operate first, and will cause the last surviving joint tenant to acquire full ownership of the property after all other joint tenants have died).  When only one joint tenant remains alive (when he has become the sole owner), the TOD deed will become the next-in-line method of distribution, capable of transferring ownership of the property (next step) to whatever beneficiary or beneficiaries that last surviving owner has named in the TOD deed. 

It may be easier for banks to understand this by comparing it to what exists with deposit accounts held in joint tenancy.   Several years ago, a statute was amended to allow a POD provision to be placed on a deposit account held in joint tenancy.  As that deposit provision states (Section 901(B) of the Banking Code), you can have both a joint tenancy and a POD provision on the same account, but the joint tenancy operates first, and the POD provision has no effect until the death of the last joint tenant.  The same process will apply where real estate is held in joint tenancy and one or both joint tenants execute and record a TOD deed.

Many joint tenants will want to execute a TOD deed, even while both of them remain alive.  They cannot be sure which one of them will survive the other, or whether the survivor will still be competent and able to execute such a deed at the point in time when that person becomes the only surviving owner.  Putting the TOD deed in place while both joint tenants are living provides “peace of mind.”

10.  Revoking a Deed

An ordinary deed that is delivered and filed cannot be cancelled if the person executing it later changes his mind.  In this respect, a transfer-on-death deed is radically different. Section 1254 provides two separate means of revoking an already-filed transfer-on-death deed, while the owner remains alive:  First, the owner can execute and acknowledge “an instrument revoking the [beneficiary] designation.”  This instrument must be filed (before the owner’s death) in the county clerk’s office of the county where the real estate is located.  Doing so cancels the previously-filed transfer-on-death deed. 

As a second method, the owner can execute and file a subsequent transfer-on-death deed, naming a different beneficiary or beneficiaries than named in the first TOD deed. (The effect of doing this is similar to executing a later will that cancels all prior wills. Filing the later-dated transfer-on-death deed, before the owner’s death, cancels and replaces the effectiveness of any earlier-filed TOD deed.)    

Just as a POD beneficiary designation on a deposit account can be changed or removed at any time prior to death, an owner of real estate can change or remove the beneficiary designation in a TOD deed by using either of the above methods.

11. Title Passes at Death

Section 1255 makes clear that title to the interest in real estate covered by the TOD deed will vest in the designated beneficiary or beneficiaries upon the death of the record owner.  (Similar to the manner in which a POD provision operates on a deposit account, the beneficiary under a TOD deed immediately becomes the new owner  of the deeded real estate interest upon the death of the record owner, with nothing passing to the deceased’s estate.)

To evidence the fact that the record owner has died (giving rise to the beneficiary’s ownership), a notarized affidavit must be recorded in the county clerk’s office, executed by the beneficiary or beneficiaries, stating the fact of the record owner’s death, stating whether or not the record owner and beneficiary were husband and wife, and providing the legal description of the real estate.  If the deceased owner and the beneficiary were not husband and wife, a copy of the death certificate must be attached, as well as an estate tax release.  (For deaths after December 31, 2009, there will no longer be an Oklahoma estate tax, no matter how large the estate.)

12.  Encumbrances on Real Estate

Section 1257 makes clear that the record owner of real estate subject to a TOD deed, while he remains living, is free to deal with the property in any manner that he wants, including mortgaging or selling it—just as freely as the owner of real property could do if it were not subject to a TOD deed:

“A record owner who executes a transfer-on-death deed remains the legal and equitable owner until the death of the owner and during the lifetime of the owner is considered an absolute owner as regards creditors and purchasers.”

Lenders should also be greatly reassured by Section 1255(B), which provides that when there are encumbrances or contractual obligations binding the owner’s real estate interest at the owner’s death, the beneficiary of the TOD deed will take the property subject to all of that.  For example, if there is a mortgage on the property at the owner’s date of death, the beneficiary acquires the property subject to the mortgage.  If there is a contract for sale at the time of the owner’s death, the property remains subject to it; if an easement has been granted, it continues; and if there is a lien against the property, it remains a lien.

13.  When Beneficiary Dies First

Section 1255(C) provides that if the beneficiary named in the TOD deed dies before the record owner of the property, the attempted transfer will lapse.  In other words, the effect will be just as if the TOD deed never existed.  However, the same provision also allows the record owner (optionally) to name “an alternative grantee beneficiary” in the original TOD deed, who the record owner wants to receive the property if the first-in-line beneficiary is deceased.  If the record owner follows this option, the property would be transferred to the alternative beneficiary, instead of reverting to the record owner’s estate, if the first beneficiary dies before the record owner.

14. Unsecured Creditors & Claims

If an individual puts “beneficiary” or “joint tenancy” provisions on all of his “titled” assets, there may be nothing left in his estate to probate, but also nothing left for paying unsecured creditors, final medical expenses, or even funeral expenses!  

(Secured creditors will generally not have a problem as a result of the various “transfer” provisions discussed above, if their collateral is adequate:  A loan secured by a deposit account will have to be repaid before a POD beneficiary receives any balance remaining;  a lien filed on a vehicle title (and not yet paid) will continue as a lien on the vehicle, no matter to whom that vehicle is transferred; and a mortgage filed on real estate will follow the real estate, no matter what person may receive that property by transfer at death.)

The “surprise” for unsecured lenders (or those less than fully secured), and for service providers, vendors owed money on account, etc., is that a person could die with substantial net worth, and yet the net worth can go away by operation of beneficiary provisions.  Real estate is often a “big chunk” of what a lender is relying on for net worth, but now has become much easier to remove from the estate.

Looking at this with more detachment, it was already true that deposit accounts could just “go away” at death by operation of POD provisions, or joint tenancy provisions.  Also, joint tenancy has already been available as a way to transfer all of a person’s real estate, vehicles, and manufactured homes to another person at death.  In this sense, adding a transfer-on-death deed for real estate to the list of possible options may not increase the potential harm for creditors, more so than what already exists.

Still, some distinctions exist.  Where there is a joint tenancy, a loan applicant has to indicate that a balance-sheet asset is held in “joint” ownership, to be completely truthful–and the bank is thereby alerted to certain issues.  By contrast, with one-owner real estate subject to a TOD deed, the owner can truthfully state on a financial statement that he owns the whole property—but it’s true only while he remains alive. When he lists this real estate, and its value, on his financial statement, he probably isn’t required to disclose any more details, unless specifically asked.  

Going forward, banks might add a question on their financial statement form, such as, “Do any of the assets listed above have a “payable on death” or “transfer on death” beneficiary, and if so, whom?”  But a borrower could truthfully answer “no,” and then could decide to add beneficiaries a few months later.  Maybe the question is worth asking, but it’s not a sure protection against surprises, because the answer can change at any time—with no duty to disclose the change in circumstances.

After this Act was already signed, some lawmakers decided it needed to be amended.  However, this effort during the last week of the legislative session was sidetracked because of the crush of other bills being considered before adjournment.  

The main change proposed at that time (not yet adopted) would have evaluated the amount of assets remaining in an estate after giving effect to a “transfer on death” of real property to a beneficiary.  If the estate’s remaining assets would not be sufficient to pay the estate’s liabilities, the beneficiary of the transfer-on-death deed would then become liable for a portion of the claims owed by the estate—not to exceed the net value of the real estate transferred to that beneficiary. 

This proposed change is likely to be introduced again in the 2009 legislative session, and should be given serious consideration.

15.  Unintended Consequences?

A will or a trust puts a designated person under a fiduciary duty (as personal representative of an estate, or as trustee), to pay first the deceased’s funeral expenses, creditors’ claims, etc., and then to distribute the remaining assets to the heirs, in certain percentages or dollar amounts. 

When the “beneficiaries at death” approach is used as an alternative to a will or trust, an individual may think he has an equally good plan for paying his bills and dividing his assets after his death.  However, a lawyer prepares a person’s will or trust with provisions that will adjust in light of possible future events, but an individual constructing his own “do-it-yourself” estate plan (by placing beneficiary provisions on his assets) is usually thinking only of his present assets and liabilities, and present circumstances, and not anticipating future events that may significantly change his financial situation at death.  

If the individual has an extremely simple list of assets, few liabilities, and only one intended beneficiary, there’s a decent chance that the “beneficiary at death” approach will work with no unexpected or unfair outcome to anyone.

When there are multiple heirs, the chances of an unexpected or undesired outcome as a result of different “beneficiary on death” provisions placed on different assets is much greater than with a will or trust, as the following examples illustrate:

(a) A grandfather (wife previously deceased) has a sole-ownership deposit account, with his daughter as authorized signer (to help pay bills), and with his granddaughter as POD beneficiary.  He has told his daughter that he wants this account to be used by her at his death to pay his funeral expenses, with the remaining balance of the account, if any, to go to his granddaughter, the POD beneficiary.  

The first unrecognized problem with this plan is that the daughter’s authority as “authorized signer” ceases at her father’s death—which she learns from the bank when she tries to pay funeral expenses from the account.  

The second problem is that the granddaughter (and not the estate) steps into ownership of the entire account at the grandfather’s death, because of the POD provision.  It’s then an issue of how the granddaughter (not the daughter) wants the money in the account to be spent.  And the granddaughter decides she shouldn’t be expected to pay the funeral expenses out of “her money.” (This situation would never occur if a trust was holding the assets, of if the funds flowed through an estate.)

(b) Sometimes a person has a will, but puts POD and joint tenancy provisions on all bank deposits in order to maximize FDIC insurance coverage.  He often does not realize that he is “ripping up his estate plan” by doing so.  Some depositors seem to believe that putting beneficiary provisions on deposit accounts is “only for FDIC insurance purposes.”  In his own mind, he somehow believes or desires that all of his assets will still be distributed in the manner provided in his will—although the POD provisions placed on his deposit accounts actually “override” the will. 

Assets titled with a “death beneficiary” or joint tenancy provision (for example, deposit accounts, stocks and bonds, and now “real estate”) will not pass through a probate estate, and will not count as using up any portion of the specific dollar amount bequests, or percentage share distributions, as set out in a will.

Let’s say an individual has $500,000 in total assets, including $300,000 of deposits.   In his will, he wants one-fourth of his assets ($125,000 of value) to go to each of his four children (two daughters, A and B, and two sons, C and D) at his death. 

However, because he has $300,000 of deposits and he wants to be fully FDIC-insured, he puts $100,000 of deposits in his sole name (no beneficiaries); another $100,000 in his name, POD to Daughter A; and another $100,000 in his name, POD to Daughter B. 

What he is assuming (incorrectly) is that the $100,000 that is POD to Daughter A will count toward the approximately $125,000 share that he intends her to receive under the will; and the same for Daughter B; and he still plans for Sons C and D to get approximately $125,000 each.  (He doesn’t realize that the will and the POD provisions will not work together in the way he expects.)

Instead, the $100,000 that is POD to Daughter A will pass to here completely outside of the will; and the same is true for the $100,000 to Daughter B.  As a result, the amount of assets handled by the personal representative of the estate is $300,000.  Under the terms of the will, this $300,000 would be divided four ways and be distributed ($75,000 each) to A, B, C, and D. So A and B each would get $100,000 from the CDs, plus $75,000, but C and D would only receive $75,000 each.

(c) If there are multiple beneficiaries, the “beneficiary on death” approach can cause many issues of unequal distribution as the owner’s assets change over time. 

(A will or trust causes the net assets at death (total assets minus liabilities) to be divided into portions for each heir at a time after death, when the deceased’s net assets are finally known.  By contrast, if an owner puts beneficiary provisions on his various assets at the present time, it is quite possible that the “value” received by some beneficiaries at a future time will not equal what other beneficiaries receive.) 

For example, a father might make Child A the “transfer-on-death” beneficiary on his house; Child B the POD beneficiary on a $80,000 C.D.; and Child C the joint tenant on the father’s car, the POD beneficiary on the MMDA and checking accounts, and the beneficiary on the IRA.  Assume that each of these arrangements would have the same value (about $80,000) if the father died immediately.  The value (or size) of these assets in relation to each other, if they all even continue to exist, will almost certainly change with the passage of time, and may change even more because of the father’s financial needs and medical condition.  

For example, let’s assume that the CD that is payable on death to Child B has a provision that causes interest income to be paid out monthly and direct-deposited to the father’s MMDA.  On this basis, the asset on which Child B is a beneficiary will never increase in value (and could decrease in value, if the father decides to spend some of the $80,000).

Child A is the TOD beneficiary on the house, which might substantially increase in value over time, while the value of the CD (on which Child B is POD beneficiary) may never increase.  Alternatively, the father might sell the house to go into an assisted living center, and deposit the proceeds in the MMDA.  On this basis, the only asset (the house) on which Child A is a beneficiary goes away; the CD on which Child B is a beneficiary remains the same in value; and the total of the accounts on which Child C is beneficiary would increase dramatically (because the proceeds from sale of the house are deposited to the MMDA).  

Or, a different way around, the house (which it TOD to Child A) might be retained, while all of the other assets are either sold or spent to support the father.  Finally, after other assets are all exhausted, the DHS will pay nursing home benefits for the father (while allowing the house to be retained, if not too valuable).  So it’s possible that Child A would still be in a position to inherit the house (by TOD deed), while the assets on which Child B and Child C were originally beneficiaries would be entirely spent.

Where there are multiple heirs, the final result of using “do-it-yourself” beneficiary provisions can be far different from what was originally intended.