In our last post, we provided a broad overview of the purpose and function of non-probate transfers in Texas. This post addresses the most common ways people accomplish non-probate transfers—the placement of different designations on financial accounts like common checking and savings accounts, along with investment accounts such as IRAs and 401Ks.
POD and TOD Accounts Simplify the Probate Process in Dallas, Texas
The most common way to accomplish a non-probate transfer in Texas is by using payable-on-death (“POD”) and transfer-on-death (“TOD”) designations. PODs and TODs are also called beneficiary designations. The designation tells the bank, “This is the person or persons who will receive my account automatically upon my passing.” There is no difference between the function of PODs and TODs. So why use two different terms?
POD designations typically apply to savings accounts, checking accounts, and certificates of deposit. In contrast, TOD designations apply to brokerage accounts, retirement accounts like IRAs and 401Ks, stocks, bonds, and other investments. Functionally, however, both PODs and TODs operate the same way.
Often, banks will ask their customers to add a POD or TOD when they open an account. This is purely optional and up to the customer’s discretion. Further, these designations can be added, changed, or removed any time after opening the account. Usually, the customer has the option to name multiple persons as beneficiaries, who will receive equal portions of the account upon the customer’s death. Many banks allow customized percentages. For example, I could designate my sister to receive 50% of the account, while my uncle and my friend split the remaining 50%. Many financial institutions allow their customers to name contingent beneficiaries. For example, I could designate my sister to receive my account, then my uncle in the event my sister dies before me, then my friend if both my sister and uncle die before me.
If you believe you may be a POD or TOD beneficiary, you should contact the bank where you expect the account to be held. The bank will confirm whether you are actually a beneficiary. If so, banks typically require very little to transfer the account funds to you—usually just your ID and the deceased person’s death certificate. Compared to traditional probate proceedings—and even other types of non-probate transfers—this process is a walk in the park.
Texas JTWROS Accounts Provide Another Simple Way to Transfer Funds Upon Death
Accounts designated as joint-tenant-with-right-of-survivorship (“JTWROS”) offer another simple way to transfer your estate outside of a formal probate proceeding. Two people are required to open a JTWROS account. Both customers sign bank papers to show their agreement that they will be the co-owners of the account, and when one of them passes, the account becomes the sole property of the surviving person. Alternatively, a customer can convert their solely owned account into a JTWROS account by adding the new co-owner.
The use of JTWROS requires an extreme amount of trust between the two co-owners, because both have complete access to the funds before one of them dies. For that reason, the most common owners of JTWROS accounts are spouses. Checking accounts are the most common type of account to receive a JTWROS designation, though it’s possible to set up this designation with other types of financial accounts, such as retirement accounts.
The surviving co-owner should notify the bank upon the other co-owner’s death, so the bank can update the account title to reflect sole ownership. Due to the nature of a JTWROS account, however, the surviving co-owner can continue to exercise control over the account before the bank changes the title of the account to reflect sole ownership.
Joint Accounts and Other Multi-Party Accounts Do Not Avoid Probate
Let’s say you open an account with your spouse as co-owners. You see that the account is classified as a joint account. Then your spouse dies unexpectedly. Based on our discussion so far, you may conclude that you have a simple road ahead. You would be wrong.
If your joint account does not use the magic words with right of survivorship, then you have a simple multi-party account. That means the account does not pass to you automatically upon the death of the other accountholder. Instead, the deceased party’s portion of the account will be distributed according to their last will and testament or, if they did not execute a will, to their heirs at law. Please see our prior series on heirship determinations for an understanding of this process.
For the purpose of this article, however, know that you are not automatically the owner of the full account. Instead, you must identify and segregate the funds owned by the deceased accountholder. This process can be daunting. Further, as we will address in our fourth post in this series, you must address community property characterization and distribution. All of this adds another layer of complexity to the already complex world of formal probate proceedings.
In our next post, we will discuss other ways to transfer your property outside of probate—methods that are less common, but just as useful as PODs, TODs, and JTWROS accounts.
Our probate and estate planning attorneys help clients understand and access accounts transferred outside probate in the DFW area and throughout Texas. If you think we can help you, please give us a call. Our offices also serve Plano, Frisco, McKinney, Denton, Fort Worth, Garland, Irving, Austin, Houston, San Antonio, Nacogdoches, Lufkin, and Center.