Know what bugs me? Bad advice! Know what bugs me even worse as a lawyer? Bad LEGAL advice!
In this case, I'm talking about bad advice when it comes to Estate Planning. Specifically, when our clients are told that all they need to do is set up a beneficiary designation on a bank account in order to protect that account.
You may have heard those beneficiary selections called a POD ("pay on death”) designation. You establish the POD to name the person who will get the balance in the account if you pass away.
The owner of the bank account is told, often by a bank officer, that setting up the POD will keep their family out of court if that account owner dies. The bank officer who tells their customer that the POD is a good idea thinks that she is doing a good thing for that customer.
The problem is that the bank officer doesn't know all of the downsides about PODs. And there are many! So many downsides that it makes the POD downright dangerous in some cases.
A POD Avoids Probate . . . right, RIGHT? Uh, no, maybe not.
Generally, if you pass away, it is necessary for your family to hire an attorney and go to court in order to settle your affairs. You've probably already heard all about that type of court proceeding, it's called Probate.
Families usually prefer to avoid Probate if they can. And they're looking for easy ways to do so. Unfortunately, they sometimes get bad advice on how to do so safely and effectively.
Certainly, it's true that Probate cases can be time-consuming, expensive, and very very public. Avoiding Probate is a perfectly reasonable goal in planning for one’s future (we call that Estate Planning, of course!).
But, it shouldn't be the only goal. In fact, we should set a broader goal: make our families's future easier, safer… better.
There Are No Shortcuts in Planning Your Family’s Future – or Yours!
Ensuring that our spouse and children will still have a bright future even if we get very sick or pass away is very important. We need certainty, we need to be SURE that what we have set up will actually work.
There simply are no shortcuts in Estate Planning. As I often advise the young attorneys, when it comes to Estate Planning, the hard way IS the easy way. Attention to detail matters. Thoroughness is mandatory. We attorneys must work very hard to avoid mistakes and oversights in order to protect our client’s future.
It's human nature to try to find a shortcut, the easy route, the quick and inexpensive solution. But that mindset is folly when it comes to planning for your family’s future – you better get it perfect the first time, because you only have one shot to do it right.
A POD Avoids Probate . . . right, RIGHT? Uh, no, maybe not.
One dangerous shortcut are those PODs. There are many other bad mistakes that people make, which I discuss in other blog posts.
Those of you out there who tried to set up a Transfer on Death Deed - I'm looking right at you! But that's a discussion for another day.
While the POD may help you avoid probate – on one asset – it can backfire and your family will still wind up in probate. Read on . . .
Pros and Cons of a POD
Right now we're focused on PODs and what they do right but more importantly what they don't do - what they do so very, very wrong. Let's Pros/Cons this thing, shall we?
Pros of the POD.
- You get to pick who will get the balance in your bank account if you die.
- That bank account will go to your beneficiary, e.g. your spouse, your children, friends, whomever you like, without going through a Probate.
- Setting up the POD with your bank is usually relatively easy and often free.
All that sounds good, right?! Well, it is good until you look at the Cons.
Cons of the POD.
- You have to be LUCKY. You have to be very, very lucky for the POD to work. And good Estate Planning does not rely upon mere chance and good fortune.
- Beneficiary Could Predecease You. Sometimes people just don't die in the order that you expect for them to. If your beneficiary dies before you, that bank account is still going through Probate after all.
- You have OTHER Assets. The POD only applies to one type of asset – a bank account. What about your house, cars, stocks & bonds, personal property, etc, etc.? All those items will still trigger a probate, even if you set up the POD on the bank accounts.
- Contingent Beneficiaries Are Not Enough. Yes, you can set a contingent beneficiary, that is, name an alternate person to receive the account if the first one you selected dies before you, but that just reduces the risk a little, not eliminate it.
- No Unequal Distribution. What if you want to leave a small part of your bank account to one person and a larger part to another? Can you do that with a POD? Nope! It's not allowed under Oklahoma law.
- Disabled or Young Beneficiaries are a Serious Problem. What if the beneficiary becomes disabled – too sick to use the money? What if the beneficiary is too young, or is just not good with handling financial matters? Leaving the money to that person directly using the POD could prove to be a disaster.
- No Asset Protection. What if the beneficiary is facing a serious financial crisis? For example if your loved on is sued, or faces a difficult divorce, or even a bankruptcy, he or she could lose the money you worked hard to earn! That’s a problem that can arise and is hard to predict.
A Better Way – Create a Simple Trust
Isn’t there a way to avoid probate and not face all the problems of using a POD? Yes!
Oklahoma law allows us to “have our cake, and eat it too.” We can ensure that our assets (bank accounts, house, cars, etc.) go to who we wish to get them, but without all those problems.
That solution is simple – create a simple Living Trust. What’s a “Living Trust” you ask? Well, it’s a contract where you can have more power and control over your assets than ever before.
Under your Trust, you get to designate who gets what. You get to ensure that those assets go to your loved ones without the need for any court, judges, lawyers – in other words, no probate!
Best of all, this powerful estate planning tool ensures that you can:
- Avoid Probate.
- Designate a backup plan – alternate beneficiaries – if your family member or friend dies before you, you say who gets your assets instead.
- Set up someone to watch over and apply those assets for the needs of a very sick or injured family member, or one that’s too young, or one that’s just bad with money, etc.
- Protect those assets even if your loved one is sued, goes through a bad divorce, or even if he or she faces a bankruptcy.
- And . . . many, many other great benefits.
Do it now - set an appointment with your Estate Planning Attorney and find out how to make a Living Trust to protect you and your family. Don’t rely on a deceptively-simple do-it-yourself tool like a POD – it’s just not worth the risk that you will get it wrong.
The Take Away . . .
DIY in Estate Planning is a bad strategy. Pay on Death designations on your bank accounts are dangerously deceptive disappointments. Don’t do it!
PODs can sometimes have a place in a good Estate Plan, but rarely, if ever, alone. Making a POD is like if you had four flat tires on your car, and you only air up one of them. It’s just not enough.
See your attorney, set up your Living Trust, and avoid all the problems PODs cause. Your family will thank you for being smart!