Beneficiaries

Deciding on the best way to name beneficiaries can be difficult for both financial and emotional reasons. You want to set up the transfer of ownership of your assets upon your death in a manner that is fitting for your heirs while maintaining your rights to your assets while you are living.

Many types of financial assets, such as retirement accounts, annuities and life insurance policies, require the naming of beneficiaries when they are set up. However, bank and brokerage accounts normally do not require named beneficiaries.

For those types of accounts, most people choose between setting up joint-ownership accounts or payable-on-death and transfer-on-death accounts, depending on their family situations. In both types of accounts, the assets do not have to go through probate when an account owner dies, but there are significant differences between the two.

How does a joint-ownership account work?

Spouses usually set up joint-ownership accounts for practical reasons-ease of money management while living and seamless transfer of assets upon death. They are not reserved for married couples, but they are typically used by people who share household expenses. Two or more people can own a joint account, and each owner has equal access to the account. Most types of bank accounts allow for joint ownership. Setting one up-or closing one-is simply a matter of filling out the necessary forms at your bank.

What is the "right of survivorship" in a joint-ownership account?

Depending on your state's laws, joint accounts may come with or without right of survivorship. With right of survivorship, the assets in your account will be transferred to the joint owner. Without right of survivorship, the assets will be transferred according to the directions in your will.

What are the drawbacks of joint-ownership accounts?

Because each owner of a joint account has equal access to it, the owners do not have control over what the other owners do with the assets. Whether it is your spouse, partner or child, any joint owner can spend all the money in the account without your permission. However, if you want to close a joint account, all the owners must approve it.

I am getting older, and I want to make one of my children a joint owner of my accounts to help me pay the bills. Is this a good idea?

It depends. If you make one of your children a joint owner, he or she will be able to use the accounts to do your bill paying. But you cannot dictate that paying your bills is the only thing that child can do with the account. He or she will be legally free to spend your money however he or she wants.

Also, upon your death, the entire amount in your accounts will pass to the child who is the joint owner. Your other children will not receive any of it. Oral agreements to divide up the money equally are not binding. Even if the child who is the joint owner honors an agreement to pay your other children a share of the assets, he or she may have to pay hefty gift taxes for doing so.

What are "payable-on-death" and "transfer-on-death" accounts?

Like joints accounts, payable-on-death (POD) and transfer-on-death (TOD) accounts allow for the transfer of assets to beneficiaries without going through probate, but these accounts offer owners more control over their assets than joint-ownership accounts. Beneficiaries can claim the assets upon your death with proof of their identity and a death certificate, but they have no access to the money while you are living.

With a joint account, all owners must agree to terminate joint ownership and close the account. But with POD and TOD accounts, you can change a beneficiary at any time without needing anyone's permission.

All but two states allow POD accounts, which are also called Totten trusts or informal trusts. POD accounts are available at banks and credit unions. You can name a POD beneficiary for most types of accounts, including savings, checking and CDs. U.S. Treasury securities can be held in POD accounts, and you can designate a POD beneficiary on savings bonds. Creating a POD account is as simple as filling out a form that names a beneficiary.

All but 14 states allow TOD brokerage accounts. If your state does not allow TOD accounts, you may still be able to open one if your broker is in a state that does allow them.

What are the drawbacks of POD and TOD accounts?

Keep in mind that like joint-ownership accounts, POD and TOD accounts override the directions stated in your will. If you name one child a beneficiary on a POD or TOD account, but your will states that all assets should be divided equally among all your children, the POD or TOD beneficiary is not obligated to share the assets he or she has inherited. Also, some POD accounts do not allow more than one beneficiary.

Can I name a beneficiary other than my spouse?

No. If you are married, state laws dictate that your spouse must inherit your assets before anyone else can with regard to these types of accounts.

Can I have a joint-ownership account AND name a POD beneficiary?

Yes. When both owners of the account die, the assets would transfer to the beneficiary.

POD and TOD accounts bypass probate, but are they also a way to avoid paying estate taxes?

No. The beneficiary will have to pay estate taxes on the assets they inherit. The beneficiary may not be able to get the money until all taxes on the estate are paid.