You want to do right by your loved ones when you die. It’s just as important to choose the best vehicles to do so.
For starters, know the difference between a bank trust account and a payable-on-death (POD) account.
Here are a few things to consider.
Bank trust accounts
Typically, trusts are accounts managed by someone for another’s benefit. Karen McIntyre, managing director and senior financial advisor at Wescott Financial Advisory Group, explains how they work. Trusts can be irrevocable or revocable. For Revocable Trust (also known as a Living Trust), the person who set up and funded the trust (the grantor) maintains control over and manages the assets (as trustee) until they cannot or choose not to any longer. The grantor can make changes any time until they die. Once the grantor dies, assets are directed to beneficiaries per the terms of the trust, which could mean assets remain in trust. A trust dictates when assets (or income) can be distributed and controls the timing thereof. For Irrevocable Trusts, the grantor gives control to someone else (the trustee) and then no changes can be made to any feature of the trust.
Trusts accounts are where those monies are kept. With a bank trust account, the bank serves as custodian and a trustee keeps legal control of assets in the account. These assets can include cash, savings bonds, stocks, bonds, mutual funds, real estate and other property and/or investments, according to LegalZoom.com.
"Trust accounts can help ensure that your legacy is protected and that your wishes are carried out," says Elle Kaplan, CEO of Lexion Capital.
"Many banks give you a hard time putting accounts into trust. Make sure you choose an online bank or brick and mortar one that makes the process easy. There is nothing worse than trying to do the right thing, but then being turned away," says Bijan Golkar, a certified financial planner with FPC Investment Advisory.
"Ask the bank about what happens if you (and your spouse) pass away. What documentation will they require to get the successor trustee rolling? In a perfect world, the trust makes everything happen. In reality, it can be painstakingly difficult to get banks to budge," he adds.
You can use a trust account to increase your FDIC coverage. For instructions on how to do this, please refer to this DepositAccounts.com article. "But be careful and talk to a financial advisor before going down this road," cautions Golkar.
The bottom line, "A trust is preferable if you have concerns about how a recipient might spend the funds or want to remove the assets from your estate," says Benjamin Sullivan, a certified financial planner with Palisades Hudson Financial Group.
A trust can establish a system of conditions that have to be met in order for assets to be disbursed to beneficiaries, says Kaplan.
Trusts can be expensive to set up and administer due to the associated legal work and tax compliance. Trusts also can result in higher income tax expense than assets held in a POD account, due to the compressed trust tax brackets, says Sullivan.
A POD account can solve one or two problems, he says. "They are a cost effective way for an owner to have full access to funds during their life and to name who will receive the assets remaining in the account at the owner’s death."
A POD account can transfer assets immediately upon the death event.
"With PODs/TODs (transfer on death) you are telling the bank that if something happens to the account holder, those assets are to go directly to the named beneficiary or beneficiaries. Generally, all you need is a copy of the death certificate and valid identification," says Golkar. "My father had a TOD account and it was a very quick turn-around to get the funds to us brothers. As soon as we had the death certificate it all happened quickly, which helps pay for funeral expenses," says Golkar.
However these accounts are not always simple. Keith Singer of Singer Wealth Management, explains. "For instance, on a brokerage account with TOD, upon the death of the account holder, the account will be frozen until the account transfer is processed. No trades or withdraws are permitted. Many times it takes a few weeks to obtain a certificate and then process the transfer. Trust accounts do not have similar limitations upon the death of the grantor," says Singer.
Know that POD accounts can also be called tentative trusts, informal trusts or revocable bank account trusts, or as an ITF (in trust for) account.
According to attorney Mary Randolph’s blog on Nolo.com, if the account was a joint account to begin with, the bank will need to see the death certificates of all the original owners.