Avoiding Probate Through Joint Bank Accounts
While the living trust is the most flexible device used to avoid the costs and delays of probate, there are much simpler ways of effectively accomplishing the same things. One such way is through what is known as a “payable-on death” accounts. Here are some common questions and answers.
What is a “payable-on-death” account?
If your state permits payable-on-death accounts, there really are no risks involved. All you have to do is designate, on the form provided by the bank, the person(s) you want to receive any money in the account (savings, checking, or certificate of deposit) after you die. Your beneficiary can claim the money simply by giving the bank a copy of the death certificate and personal identification.
What is a “savings account trust”?
These are also known as “Totten Trusts” (the name comes from the legal case that validated this device). All you have to do is open a bank account in your name “as trustee” for someone else. In fact, there is really no trust relationship established. Rather the account functions like a “payable-on-death” (POD) account. This is an excellent method of avoiding the expense of having to enter probate.
During your lifetime you are permitted to withdraw the funds at any time for your own use. The “beneficiary” you name on the account has no rights to any of the funds while you are alive, but automatically gets whatever is left in the account when you die. Because the beneficiary has no ability to withdraw funds during your lifetime, you will not be treated as having made a taxable gift.
Some states will not permit you to open a straight out payable-on-death bank account, but will allow you to accomplish exactly the same result through what has been called the Totten savings account trust.
What is a “transfer-on-death” designation?
This is a method of avoiding probate on stocks and bonds. In most states you can simply add a transfer-on-death designation to the individual securities or to the security account. When you die, the securities will pass without the need for probate to the person you designated.
Life insurance policies
“My father had a $25,000 life insurance policy that named me as the beneficiary. But his will left everything, including the proceeds of this life insurance policy, to my sister. Who gets the $25,000?” Life insurance proceeds will normally help you in avoiding probate and pass to the person named as the beneficiary – in this case, you. Since the policy was a contract between your father and the insurance company, your father had to comply with the terms of that contract (the insurance policy) to change the beneficiary.
Most policies will not permit the insured (your dad) to change the beneficiary by his will. Under most policies, he would have had to notify the insurance company in writing of his intention to make your sister the beneficiary of the policy. So you have an excellent chance of getting the $25,000.