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CREATING A LIVING TRUST vs. USING "PAYABLE ON DEATH" FORMS

Standard Legal recently had a "real life" email exchange with a gentleman who wondered about the use of a Living Trust vs. "Payable On Death" forms...


QUESTION:

I just returned from meeting with an attorney who is listed as a Trust and Will attorney. He suggested that my wife and I not use a Revocable Living Trust. Rather, he suggested that we use a form titled "Payable On Death" for each asset that we want a specific individual to receive. He further stated it is just as legal as a Trust and has all of the same benefits without having to pay several thousand dollars to an attorney because we can prepare the simple forms ourselves.

If this is true, why is there no publicity about this option? And why are there so many law firms presenting Living Trust seminars where no mention is made of the alternative "Payable On Death" option?

Please enlighten me because my wife and I are well educated and could most likely complete Standard Legal's Living Trust forms with acceptable results.


ANSWER:

The question is a very good one, and one worthy of a detailed response.

A Living Trust offers several advantages as compared to simply listing or transferring assets to "payable on death" status - and these will be addressed below. It is worth noting, however, that many firms and financial advisors do advertise that Living Trusts are the "end all and be all" in estate planning. While a Living Trust, properly drafted and properly funded, does provide valuable protection against the expensive and time consuming probate process, a Living Trust may not always provide the protections promised by those who "oversell" the product.

A Living Trust cannot, to a large extent (and but for taking advantage of the marital tax deduction), provide a tax shelter for a person's assets. A Living Trust must be funded -- that is, assets transferred to the trust -- before it can work most effectively. These things being stated, a properly drafted and funded trust can be a valuable vehicle to allow one to oversee the management of his or her assets while alive and to provide direction for the distribution of one's assets upon his or her death.

Your attorney was correct in stating that if you establish "payable on death" status (or transfer on death, as it is referred to in some situations) on your home, vehicles, bank accounts, investments, etc., you can avoid many of the costly and inconvenient processes required by the probate court and can accomplish some of the same benefits that are available through a trust.**

[** Standard Legal is not aware of a generic or single document that is available for all assets where one simply lists his or her assets and then declares them "payable on death." For real estate to be "payable on death" or "Transfer on Death," one must prepare and sign a deed using the State required "magic language" to create the beneficiary status; for a vehicle, the "payable on death" language must appear in the State issued vehicle title or by utilizing the State issued paperwork. I would suggest using caution in simply signing a piece of paper that attempts to create "payable on death" status for assets that are owned via deed or title, as these assets generally require specific forms or paperwork to establish the payable on death status.]

For example, most states now allow title in real property to be held in one's name, transferable on death to another person named in the deed (these are referred to as "Transfer on Death" deeds or TOD deeds). The greatest benefit of this type of deed is that no current ownership is vested in the person named as beneficiary in the deed - such ownership only occurs when the person named as owner on the deed dies. Then, upon death, ownership of the property vests in the person listed as beneficiary, thereby avoiding probate (although a probate case may, in some states, still need to be open so that an affidavit of death can be filed to establish the death of the person listed as grantor - but this takes only minimal effort and is not as costly as a "full" probate proceeding). The same benefit is available for vehicles, bank accounts and other assets that can be listed or titled as payable on death.

However, one advantage of the Living Trust, as compared to simply holding title to assets "payable on death," is found where the maker of the trust becomes incapacitated during his or her lifetime and is unable to make his or her own decisions for some extended period of time. The Standard Legal Network Living Trust is drafted so that the maker of the trust (the person setting up and signing the trust document) is his or her own trustee - and as trustee, he or she oversees the trust assets for his or her own support and care while he or she is alive - and then, upon his or her death, the trust assets are distribute to whomever is named as beneficiaries in the trust, or can continue to be held for the benefit of some third person or entity). The Standard Legal Network Living Trust also allows the maker of the trust to name an alternate trustee to oversee the trust assets (as well as the trust's goal of supporting and caring for the maker of the trust while he or she is alive). As such, if the maker of the trust would suffer a stroke, for example, and could not make decisions for himself or herself, the person named as alternate trustee could manage the maker's assets so as to be able to fund the medical care required by the trust maker (and to pay for the maker's living expenses as well). If required, the alternate trustee could sell the Living Trust's assets, liquidate an investment account, convert an asset to cash, etc.

If the person suffering the stroke did not establish a Living Trust but, rather, simply held his or her assets as "payable on death," the persons providing care to the person suffering the stroke may not be able to sell, transfer, adjust or otherwise have access to the person's assets so as to be able to generate cash for the care of the person suffering the stroke - for the simple reason that the person suffering the stroke still holds actual title in these assets and he or she is the person that would be required to sell, transfer, liquidate, etc. these assets. And if he or she is incapacitated, doing so may be problematic.

Further, not all assets can be held as "payable on death." Personal property (such as home furnishings, watches, jewelry, etc.) is not generally capable of being titled in a "payable on death" fashion, simply because such items are not owned "in title" - meaning that no paper establishes ownership (as compared to a deed for a home or a title for a vehicle or boat).

Also, while you possess the capacity to do so, you are always free to revoke or change the Living Trust that you create - you can add or eliminate beneficiaries; you can add or eliminate assets from the trust; you can name a different trustee if you wish simply by modifying the terms of the existing trust. When you name someone on a deed or vehicle title as the beneficiary "payable on death," if you later change or your mind, or if the person named as beneficiary dies, or if circumstances change so that the beneficiary is to no longer receive the asset upon your death, you would need to prepare and file a new deed with the county recorder or deed office or obtain a new or clean vehicle title from your state's bureau of motor vehicle - and these steps that can be somewhat cumbersome and inconvenient.

Again, if you wish to transfer specific assets that you own to a "payable on death" beneficiary that you name, you can certainly accomplish your goal of transferring assets upon your death outside of the reach of the probate court. However, as stated above, not all assets (i.e. personal property) can be transferred via "payable on death" and merely recording or titling assets in a "payable on death" format will not offer you the same ability to manage such assets in the event of disability or incapacity while alive. Also, there are other advantages of utilizing a Living Trust that are outside of the scope of your inquiry (e.g. utilizing insurance for the benefit of the trust beneficiaries, creation of special trust provisions for care or education of children or grandchildren, etc.) that should be considered when reviewing or deciding the best vehicle for your estate planning needs.



FOLLOWUP REPLY:

Thank you for your explanation of Living Trust vs. payable on death. You confirmed my thoughts developed through studying the need for a Living Trust as published by various attorneys as well as attending several seminars hosted by various attorneys even though POD was never addressed and I, therefore, did not know it even existed.

You also furnished me with new insights and the need for a Living Trust. As a retired accountant who practiced in the public arena I have full knowledge of our assets and what we want done with them upon death. Accordingly, I believe I can properly prepare the documents required by using your program that I plan on ordering today. I received the impression during our meeting with the local attorney that he was not qualifying us correctly because he did not look at a single document I offered him and therefore had no idea how many digits there are in our net worth.

 

 

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