In trust for vs. payable on death are two popular ways to transfer homes, vehicles, cash and bank accounts. Read on to learn more about the differences.
Estate plans can be drafted to transfer property and assets from one person to another upon death. They are not limited to the rich and powerful and can present even a modest estate with considerable benefits over dying intestate (without a will). But there is more to an estate plan than simply listing your relatives and announcing to whom you plan to bequeath the family home or farm.
Estate planning includes many different tools made to give the respective grantor or testator the ability to freely customize and optimize the way they distribute their belongings before and after death. This includes financial assets, bonds, stocks, investments, life insurance payouts, retirement account remainders, and savings accounts.
Special clauses on bonds, investments, and financial accounts in particular offer you the ability to transfer a substantial amount of cash to one or multiple people without requiring that the account first passes through probate.
This is important because the probate process can be costly and lengthy, and the lighter your overall estate, the easier it becomes to expedite or "skip" the probate process. While trusts can transfer homes and vehicles, cash and bank accounts can be transferred via beneficiary designations. Two popular ones are payable on death clause (POD) and an In Trust For (ITF) account. So what is in trust for vs. payable on death?
An account held in trust for a beneficiary is designed similar to any other trust vehicle, wherein the grantor can play the role of trustee for the sake of a beneficiary, who holds an equitable interest in the account.
Doing so also allows the grantor/trustee to distance themselves from the account's contents, as it becomes an entity held in trust for a beneficiary rather than an account under the grantor's ownership. This acts as a form of asset protection when deliberately designed as such.
Asset protection can be helpful in cases where you want to exclude property and accounts from your estate's total value to lower your estate tax in states where there is no inheritance tax.
Asset protection is also important in cases where you might leave debt behind and do not want your family to be burdened by creditors. Dissociating an account from yourself by holding it in trust for a beneficiary can help safeguard it from a creditor's claim.
There are three elements to an ITF account like any other trust: the grantor, the trustee, and the beneficiary. An ITF account requires a named trustee, which can be the grantor themselves, but it does not have to be.
Grantors or account holders set up the trust and name a trustee. The trustee follows the grantor's instructions and has a fiduciary duty to the account's designated beneficiary. An account held in trust can have multiple beneficiaries. Examples of accounts and assets that can be held in trust for a beneficiary include:
As a trust, there is a lot of flexibility behind an ITF account. You can instruct the trustee to withhold the account's contents until the beneficiary has reached a specific milestone, such as finishing school, reaching a certain age, or some other condition.
Trustees can also be instructed to manage the assets within the trust and grow the wealth responsibly. Doing so also allows you to provide a passive income for your loved ones after death by using the principal capital of the trust as an investment vehicle.
You can discuss all how an account held in trust for a beneficiary can be used to safeguard and grow your money by discussing it with an estate planning professional, a CPA, or a financial advisor.
Another way to ensure that the contents of an account pass immediately to a loved one (or multiple loved ones) without first passing through probate is via a payable on death (POD) clause. This is similar to the transfer on death clause that can be applied to specific pieces of real estate and vehicles.
By assigning a designated beneficiary to an account or financial instrument, they effectively become the owners of that account after your death.
There is no gift tax on this transfer, as it occurs upon death. While the account is exempt from probate, it is not exempt from the total valuation of the estate for tax purposes, unlike an account or financial instrument placed in an irrevocable trust, for example.
There are pros and cons to simply assigning a beneficiary to an account rather than setting up a trust for it. For one, it is much simpler, and in many cases, it can help you achieve the same outcome. But there are distinct tax advantages and flex options that you may be missing out on.
Whether you decide to avoid probate via a designated beneficiary or a trust, it is important to review your choices thoroughly. Trusts generate ongoing expenses, such as the trustee's fee, whereas a beneficiary designation is little more than some paperwork to name and verify your choice of beneficiary.
Every person's financial circumstances, options, and familial considerations are often wholly unique and require a tailored approach. Perhaps you will personally be best suited to utilize the payable on death clause to distribute wealth to your loved ones after death. Perhaps it is best for you to entrust your wealth to a trustee.
In either case, discussing your situation thoroughly with a professional should always be a top priority when tackling something as potentially complex as a comprehensive estate plan.
Aside from worrying about how best to transfer financial assets, estate plans also help you address the state and federal tax considerations you may face, how to deal with certain creditors, setting up a medical advance directive in cases of chronic illness, and much more. If you have more questions about in trust for vs. payable on death, contact our team.
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