Table of Contents
Intro
Transfer-on-death (TOD) and payable-on-death (POD) designations have grown in popularity in estate planning. To the average client, these designations can be very appealing. Some of the benefits of naming an individual, or inter vivos trust, as POD or TOD designee include but are not limited to:
Avoidance of probate;
Quicker settlement and payment of the account to which the POD/TOD relates;
Avoidance of the need to prepare and validly execute legal documents; and
Where an individual designee is involved, avoidance of fiduciary appointments and associated duties/liabilities.
There are tons of articles out there both encouraging, and discouraging, POD and TOD designations as an estate planning tool. I won’t rehash those, and instead offer the following as a “quick” summary:
But, there is not a lot of guidance for those who are affected by POD and TOD designations of a deceased client. What if, for example, you represent a beneficiary of an estate or revocable trust that is to be split equally between the beneficiary and their siblings, but one of your client’s siblings is named under a POD/TOD designation? What are your legal options?
Likewise, what if you represent a personal representative of a decedent’s estate with significant nonprobate assets, especially accounts transferred by POD/TOD designations? What duties do you have with respect to those accounts, or to at least collect information about those accounts and the named recipients?
Or, let’s say you are a financial advisor with a client inquiring about POD and TOD designations, based on an article they read online. What responsibility do you have to adequately inform your client about this planning option?
These are not simple questions to answer, and this article itself will not completely answer these questions. But, the questions themselves are a good starting place. And, knowing what to do next can be important as well. This article introduces some of these issues, including outcomes that often fly under the radar - not necessarily in order but instead to whet your appetite for a broader mini-series of content.
Financial Advisors
“James Frederick Schmidt, a former Edward Jones investment representative, testified that the decedent had visited him seeking explanation of a "transfer on death" account option. Schmidt recalled that he explained to the decedent "that whoever he listed as the beneficiary there would be the recipient of whatever we were holding at Edward Jones," and "that in doing that, this particular portion of assets that were there did not have to go through probate. It would automatically go to whoever was listed as the beneficiary." Schmidt added that he habitually told his customers that they could utilize the transfer on death option to divide an account amongst several beneficiaries. In Schmidt's opinion, the decedent understood his explanation of the transfer on death option.”
In re Payment Estate, No. 281723 (Mich. App. 11/17/2009), No. 281723., No. 282529. (Mich. App. Nov 17, 2009)
If you are a financial advisor discussing POD or TOD designations with clients, note that this particular advisor was called into court to testify about the specific guidance given with regards to a TOD designation. While the case itself did not impose liability on the advisor (because it was instead a dispute between estate beneficiaries), recognizing this outcome can indeed seem ominous. Few of us want to deal with estate contests.
But, for those advisors caught in the wave of good feelings about adding estate planning to your menu of financial services, note that it is not all sunshine and rainbows. Planning seems to work, until it does not.
For example, if you knew your client had multiple children, yet wanted to name one of them under a POD or TOD (in a way that you knew would create unequal shares for the client’s children), would you be obligated to execute the client’s instructions without question? Would you at least caution the client on the outcome? Or, would you take it a step further to discourage this individual POD or TOD?
Not to scare you, but the Iowa Supreme Court has recognized duties to a client’s intended beneficiaries - both for life insurance agents and financial advisors. The great irony is that, depending on the state, these duties could be broader than the duties for attorneys. As discussed in this article, while an estate planning attorney may have duties to intended beneficiaries and liability for foreseeable harm, the attorney is not obligated to question or second-guess a client’s intentions. And, many states isolate an attorney’s duties solely to the client and refuse to extend these duties to intended beneficiaries.
So, knowing what your state says is half the battle. In the worst case, once a client gives you instructions to execute a POD or TOD designation, this may create a duty between you and the intended beneficiary. How can you effectively carry out this duty, especially if you suspect the intended beneficiary’s inheritance could be subject to challenge by other family members? In this vein, does your knowledge of the family’s dynamics enhance this duty?
As noted above, these questions will have to remain unanswered for now. Iowa is not the only state with these outcomes, and a comprehensive roadmap is forthcoming.
Personal Representatives and Executors
Personal representatives and executors have an odd tension with POD and TOD accounts. For ease of analysis, this article considers some provisions of Colorado’s Revised Statutes (C.R.S.) regarding the scope of a personal representative’s power. But, these principles often apply in other states.
To start, POD and TOD designations may convert an account into a “nontestamentary” transfer. The outcome is that the account is not subject to estate administration (C.R.S. 15-15-214). Also, the POD, TOD, or survivorship interests cannot be overridden by a will (C.R.S. 15-15-213(2)). As a result, the named designee(s) are automatically treated as the account owner(s) following the deceased owner’s death (C.R.S. 15-15-212(2)). The financial institution is free to pay out the account to such new owners solely upon presentation of proof of death (C.R.S. 15-15-223).
Personal representatives have a duty to satisfy claims against the probate estate, such as creditor’s claims and statutory rights of spouses and dependents (such as the elective share and family allowance). These claims may be satisfied from POD and TOD accounts. (C.R.S. 15-15-103).
However, the financial institution has no duty to stop payment unless they know about claims in advance. (C.R.S 15-15-226). Stopping payment requires the personal representative, or executor, to notify the institution in writing in advance of payment with the financial institution having a reasonable opportunity to act on the notice (C.R.S. 15-15-226(2)). Once such notice is provided, the financial institution can only protect itself by getting the consent of the “successor of the deceased party.” Once funds are paid out, any remedies must be sought against the payees - even if the financial institution should have known about a superseding claim (like community property).
So, if nothing else, the personal representative or executor should consider providing a protective written notice to each financial institution soon after death - regardless of whether the personal representative has specific knowledge of the existence of a POD or TOD designation. This requires quick action to identify accounts and institutions. And, finding the right address to which to send this notice might be at least half the battle.
Affected Beneficiaries
I have left the affected beneficiary to last, because their remedies depend on who is liable above. Once funds are paid out, the beneficiary may have to go after the designee or recipient under a POD or TOD account. This takes the financial institution out of the picture, even if it has deeper pockets. But, as noted above, the advisor and attorney could be involved parties if they owed a duty to the beneficiary with respect to a POD or TOD account.
Nonetheless, there is a lot of ground to cover here as to the theories of recovery. There could be a contest to the POD or TOD designation itself, perhaps due to lack of capacity and/or undue influence. There could be claims of misrepresentation and fraud. The standards of review and evidence, along with the burden of proof, could be different than for a will or revocable trust. Equitable remedies after payment could be invoked. Nonetheless, we lack clear guidance, and I hope to bring a better framework to the structuring of these legal claims and theories. Stay tuned for more.
Conclusion
I know this article left us with more questions than answers. But, much like it is a good idea for a personal representative to provide a protective notice to financial institutions before accounts are paid out to a POD or TOD designee, I wanted to protectively “claim” some of the issues in writing to be covered in the near future.
For the time being, I don’t want to scare you, but the integration of estate planning into the financial planning space does often toe a fine line between financial advice and legal advice. The average advisor is not aware of this line, and I would venture to guess that the average attorney is also not aware of this line. And, while case precedents can show us this line under specific facts and circumstances, they are not always sufficient to create a safe harbor or best practice. Nonetheless, I hope to summarize some of the cases out there (similar to the Iowa cases cited above) to bring more clarity - especially to advisors wishing to add value in this area.