Assigning beneficiary to accounts?

Discussion in 'Financial Planning' started by dumbstruck, Feb 10, 2011.

  1. dumbstruck

    dumbstruck Guest

    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.
     
    dumbstruck, Feb 10, 2011
    #1
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  2. dumbstruck

    dumbstruck Guest

    On Feb 9, 11:12 pm, dumbstruck <> wrote:
    > 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.


    Oh, this must be the famous TOD option, but surely it can't bypass the
    various state and estate taxations and such? Is this so
    straightforward and simple as it appears?
     
    dumbstruck, Feb 10, 2011
    #2
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  3. dumbstruck

    JoeTaxpayer Guest

    On 2/10/11 4:12 AM, dumbstruck wrote:
    > 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?


    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    "beneficiary" account, properly titled, can be withdrawn over lifetime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.

    > TradIRA: Can they file to take possession probate free, and then pay
    > tax or somehow keep it as an IRA?


    Again, if designated beneficiary was listed, same options as Roth,
    Spouse can take in own name, non-spouse must start RMDs.

    > 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.


    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.
     
    JoeTaxpayer, Feb 10, 2011
    #3
  4. On Thu, 10 Feb 2011 07:43:06 CST, JoeTaxpayer
    <> wrote:

    >
    >> 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.

    >
    >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
    is tricky.
     
    HW \Skip\ Weldon, Feb 10, 2011
    #4
  5. dumbstruck

    Igor Chudov Guest

    On 2011-02-10, JoeTaxpayer <> wrote:
    > 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.


    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?

    i
     
    Igor Chudov, Feb 10, 2011
    #5
  6. dumbstruck

    JoeTaxpayer Guest

    On 2/10/11 11:47 AM, Igor Chudov wrote:
    > 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.

    http://law.freeadvice.com/estate_planning/probate/probate_cost.htm

    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.
     
    JoeTaxpayer, Feb 10, 2011
    #6
  7. dumbstruck

    Guest

    Igor Chudov <> writes:

    > On 2011-02-10, JoeTaxpayer <> wrote:


    >> 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.

    >
    > 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?


    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.



    --
    Plain Bread alone for e-mail, thanks. The rest gets trashed.
     
    , Feb 10, 2011
    #7
  8. dumbstruck

    dumbstruck Guest

    On Feb 10, 7:20 am, wrote:
    > 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.


    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.
     
    dumbstruck, Feb 11, 2011
    #8
  9. dumbstruck

    JoeTaxpayer Guest

    On 2/10/11 7:46 PM, dumbstruck wrote:

    > Person A has a will donating everything (the residual?) to Charity B,
    > and a $100k brokerage account with beneficiary set to Charity C.


    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.')
     
    JoeTaxpayer, Feb 11, 2011
    #9
  10. dumbstruck

    bo peep Guest

    On Feb 10, 5:46 pm, dumbstruck <> wrote:
    > 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.


    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
    died.
     
    bo peep, Feb 11, 2011
    #10
  11. dumbstruck

    dumbstruck Guest

    On Feb 10, 9:53 pm, bo peep <> wrote:
    > On Feb 10, 5:46 pm, dumbstruck <> wrote:
    >
    > > 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.

    >
    > 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.


    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
    CharityB= 0?
    ... or would they get the reverse, or both get $25k?

    brokerage= $100k, rest of estate= 0, so CharityC= $100k and CharityB=
    0?
    ... or would they get the reverse, or both $50k?
     
    dumbstruck, Feb 11, 2011
    #11
  12. dumbstruck

    bo peep Guest

    On Feb 11, 1:42 am, dumbstruck <> wrote:
    > 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 think so. See this article
    http://www.kiplinger.com/features/archives/2003/04/POD-TOD.html

    "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 peep, Feb 11, 2011
    #12
  13. dumbstruck

    JoeTaxpayer Guest

    On 2/11/11 11:39 AM, bo peep wrote:
    > On Feb 11, 1:42 am, dumbstruck<> wrote:
    >> 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 think so. See this article
    > http://www.kiplinger.com/features/archives/2003/04/POD-TOD.html
    >
    > "With either a transfer-on-death 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?
     
    JoeTaxpayer, Feb 11, 2011
    #13
  14. dumbstruck

    dumbstruck Guest

    On Feb 11, 6:39 am, bo peep <> wrote:
    > "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."


    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
    that account!

    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
    lifetime.
     
    dumbstruck, Feb 11, 2011
    #14
  15. dumbstruck

    Guest

    dumbstruck <> writes:
    > On Feb 10, 9:53 pm, bo peep <> wrote:


    > 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


    The tax man has a claim on everyone and anything which got
    proceeds from the estate.

    > would seem ready to pass tax free is a Roth account. Apparently a


    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
    the death).

    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.


    --
    Plain Bread alone for e-mail, thanks. The rest gets trashed.
     
    , Feb 11, 2011
    #15
  16. dumbstruck

    dumbstruck Guest

    On Feb 11, 7:22 am, JoeTaxpayer <> wrote:
    > 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?


    The SEC has a TOD writeup that references this link which confirms the
    intent to avoid probate http://www.nccusl.org/nccusl/uniformact_summaries/uniformacts-s-tutsra.asp

    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
    house.
     
    dumbstruck, Feb 11, 2011
    #16
  17. dumbstruck

    dumbstruck Guest

    On Feb 11, 8:01 am, wrote:
    > 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.


    Clawback! Thanks, it all makes sense now... no perverse incentives as
    long as clawback is feasible without undue expense or difficulties
    (may be a big if).
     
    dumbstruck, Feb 11, 2011
    #17
  18. dumbstruck

    dumbstruck Guest

    On Feb 9, 11:31 pm, dumbstruck <> wrote:
    > Is this so
    > straightforward and simple as it appears?


    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
    accounts.

    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
     
    dumbstruck, Feb 11, 2011
    #18
  19. dumbstruck

    bo peep Guest

    On Feb 11, 10:22 am, JoeTaxpayer <> wrote:
    > Bo - I hope a professional with this specific experience will answer.


    I did some more research, and it appears that the following are the
    relevant factors:

    If the decedent left a will, the will controls who & what pays the
    estate tax.
    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
    http://wislawjournal.com/blog/2010/05/10/estate-liable-for-taxes-on-pod-accounts/
     
    bo peep, Feb 12, 2011
    #19
  20. dumbstruck

    Guest

    bo peep <> writes:

    > If state law puts the entire obligation on the estate, the estate pays
    > the entire tax, if there are sufficient funds.


    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.

    > 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


    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.)

    > Supreme Court changed the Wisconsin law just last year. See
    > http://wislawjournal.com/blog/2010/05/10/estate-liable-for-taxes-on-pod-accounts/


    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...

    --
    Plain Bread alone for e-mail, thanks. The rest gets trashed.
     
    , Feb 13, 2011
    #20
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