This column first appeared in the San Antonio Express-News on November 1, 2014
Dear Mr. Premack: I have been living with my significant other for around 30 years, and we have always agreed that we like this arrangement and have no desire to marry. We do take care of each other, and have even both made trusts for our separate assets. His trust says his assets will benefit me for life, and then pass to friends, family members and charities he favors. Mine has similar provisions for him, and then designates some family and charities I like. Most of my funds are held in a single brokerage account, and recently the advisor suggested that I make the account “transfer on death” to my significant other. What is your take? – DM
The advisor is giving you a generic recommendation that might be correct for some people, but is not correct for you. The brokerage firm, like many financial institutions, is seeking to reduce its own exposure to possible liabilities. They worry about what they should do when you die, know that your funds will have to be distributed to someone, and tend to put their own interests first.
Traditionally, distribution instructions would have been contained in a Last Will and Testament. When the account owner dies, her Will would be admitted to probate in court. The court would grant “Letters Testamentary” to the person she selected as Executor. Her Executor would contract her broker to provide her death certificate and Letters Testamentary. The broker would release her funds to the Executor, and would be relieved of liability for the assets.
Many financial institutions want to take that process “in-house”. Texas law allows an account owner to enter into a contract with the broker or bank providing binding legal instructions for after-death distribution of the assets. Those instructions are generically referred to as non-testamentary designations. More specifically, they include: 1) right of survivorship (ROS), 2) pay on death (POD), or 3) transfer on death (TOD) designations.
When a deposit contract includes a non-testamentary designation, the financial institution follows those instructions. When the account owner dies, they wait for the beneficiary to present the death certificate, and deliver the funds to that beneficiary. By contract and by law, the financial institution has no further liability for those assets. They like the simplicity of the arrangement, and will often suggest/offer it without considering the broader impact.
The key point is that. In your case, you and your significant other have created trusts that contain your instructions for distribution of your assets.
If you take your broker’s advice your own plans and interests will be sabotaged. If you sign a TOD designation to your significant other, when you die the funds in the account are owned by him. They are lifted outside of your Trust. It makes it easy for the brokerage firm, but your wishes are ignored. Your significant other is no longer restricted to lifetime benefit from your funds. Your friends and charities no longer receive your funds. Instead, the TOD makes him owner of the funds. When he dies, the funds pass to his friends, his family and his charities. That directly contradicts your instructions and is not desirable.
Inform your broker you have a binding estate plan in the form of a Trust. Ask the broker to designate your Trust and its Trustee as owner of your account. The broker will likely desire a copy of the Trust, and will happily comply with your instructions because the Trust designation also relieves the broker of liability when you die. It also fulfills your instructions instead of substituting an inappropriate generic solution.
Discuss the broker’s suggestion with your estate planning and probate attorney. You need to be sure your Trust, your Will, your Durable Power of Attorney and your Advance Medical Directives comply with current law and with your current wishes. Reviewing your legal documents with your attorney will assure a smooth transition upon your demise.
Paul Premack is a Certified Elder Law Attorney in San Antonio. His firm has offices in Texas and Washington, and handles estate planning for all ages, probate law and business entity formation issues. Submit estate, probate, elder law and LLC questions at www.TexasEstateandProbate.com or go to www.Premack.com to view past legal columns.