Can I Use “Payable On Death” Forms Instead of Creating a Living Trust?

Payable on Death forms are a legitimate way to provide assets to a named beneficiary without going through Probate Court to do so. But there are a number of significant limitations to Payable On Death documents. And while creating a Living Trust is a bit more complicated to create and manage, a Trust offers several advantages when compared to simply listing or transferring assets to “Payable on Death” status.

If a person establishes “payable on death” status (or “transfer on death” as it is referred to in some situations) on a home, vehicles, bank accounts, investments, etc., that person 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.

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. (Note that a probate case may, in some states, still need to be opened so that an affidavit of death can be filed to establish the death of the person listed as Grantor. This process takes only minimal effort and is not as costly as a “full” probate proceeding).

The same benefits to the Payable On Death process is available for vehicles, bank accounts and other assets that can be listed or titled as payable on death.

But there can be some significant advantages to creating a Living Trust as compared to simply holding title to assets “payable on death.”

The Standard Legal Living Trust allows the maker of the trust to name himself and 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 names himself trustee and suffers an incapacitating health issue like a stroke, for example, and could not make decisions for himself, 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 person providing care to the maker 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 types of assets can be held as “payable on death.”  Personal property such as home furnishings, watches, jewelry, etc. are not generally capable of being titled in a “payable on death” fashion, simply because such items are not owned “in title” — i.e., 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.

Be aware that 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 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. Use 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.

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.