Should A Bank Account Be Payable On Death Or Placed In A Living Trust?
As you set up your will and estate plan, you have to decide whether or not to place your estate in a living trust. If you decide to set one of these up, because they're a terrific way to get your estate out of the probate pipeline, you then have to decide if you'll add your bank account to the trust or if you'll turn it into something called payable on death. Payable on death just means that when you die, the money goes to a specific person named as a beneficiary, rather than giving the money to the trust to be distributed by the trustee. But there are times when you want your money to stay in the trust instead, and a trusts lawyer can explain the process.
Payable on Death Is Very Easy to Set Up
Payable on death is very easy to set up. With payable on death, you can literally go onto your bank's website, log into your account, and add a beneficiary name to change the account to one that is payable on death. Nothing else about the account changes. With a living trust, the name on the account has to change because the trust now becomes the owner of the account. Sometimes you even have to close the original account and transfer the money to a new account. But at the same time, once all those changes are done, using the account through the living trust is extremely easy. You own your trust until your death, so you don't need approval to get money.
What if the Estate Has Debts?
Estates of deceased persons are responsible for the debts of the deceased person. Some of these debts, especially for small estates, may be erased by the company. For example, when you call a credit card company about canceling a deceased person's card, the company may erase the debt along with closing the account if the debt and estate are small. (That will vary between companies, of course, so never assume that they'll make the debt disappear.) But if the estate has back taxes to deal with, the trustee will need money to pay those off. If the bank account is made payable on death with the trustee as beneficiary, then there's not much of an issue since they'll end up with the money anyway. But if the account goes to someone else, that leaves the trustee trying to explain that there's no money to the IRS and state tax agency. If you set up a payable on death account, you have to make sure the trust retains enough cash to pay your debts. Or, better yet, add the bank account to the living trust if you know you'll have debts that need to be paid.
Your Trust Can Be a Beneficiary
Maybe you don't want to deal with changing anything officially for your bank account; you're willing to name a beneficiary but don't want to set up a new account that's owned by the trust or deal with any special conditions that the living trust requires. In that case, you can combine strategies and name the trust as the beneficiary. You'll need the trust to be officially set up first; if you haven't done that yet, temporarily name someone as the beneficiary, set up the trust, and then change the account's beneficiary name.
Retirement planning shouldn't be this complicated, but the legal system for handling estates after death requires a lot of detail. Meeting with a trusts law firm like Skeen Law Offices can help you make your decision.