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Court case highlights possible risks of pay-on-death accounts in estate planning

by Legacy Plan | July 15, 2016

Estate plans can employ many different tools to accomplish the desired goals. In some plans, a pay-on-death account can help achieve those ends. As with any estate planning technique, it is important to understand the potential risks associated with using pay-on-death accounts in your plan and make sure that your plan uses the tools that make the most sense for meeting your needs.

A North Carolina case determined what happened when an 11th-hour pay-on-death (POD) account did not meet the state's statutory requirements for such accounts. Although the money eventually was distributed to the desired person, the case still highlights the possible pitfalls of using POD accounts in estate planning.

The case centered on the estate plan of James Nelson of Boone, NC. Nelson's plan included a revocable living trust, which he had funded. In early October 2008, Nelson wanted to change his estate plan. He called his credit union to move $85,000 from an account held by his trust into a new account. The new account had Nelson as the owner and had, as its POD beneficiary, Nelson's daughter, Martha, who also lived in Boone.

The credit union employee, recognizing Nelson's voice, created the necessary paperwork and sent it to Nelson, who signed the paperwork. The following Christmas Eve, Nelson died. The credit union informed the daughter that the account had transferred to her, and she withdrew the $85,000.

Nelson's other two children sued. The trial court in the case agreed with the disgruntled children that the POD account Nelson attempted to create at the credit union did not comply with all of the statutory requirements that North Carolina law imposes. The trial court went on to decide, however, that what Nelson had done was to create a type of common-law trust called a “Totten” trust, or a tentative trust. The trust had, as its beneficiary, Nelson's daughter, Martha, and its contents consisted of the $85,000.

The disgruntled children appealed, but they lost. The North Carolina Court of Appeals agreed with the lower court that the transaction Nelson attempted to complete with a POD account was enough to recognize the creation of a separate tentative trust for the benefit of the one daughter.

In Nelson's case, he may not have had the opportunity to communicate his wishes with his other two children (as he died less than three months after he originally began trying to move the $85,000.) But his case nevertheless points out the importance of communicating with one's beneficiaries, especially when those beneficiaries are your children and you are leaving them unequal amounts of your wealth. Sometimes, communicating the reasons for your decisions can help stave off a court challenge after you're dead.

Additionally, setting up the sort of POD account arrangement Nelson attempted can create certain other risks. If his daughter Martha had predeceased him, and if he placed no alternate beneficiaries on the account, then that $85,000 would flow not back into his trust but rather into his probate estate, possibly requiring the completion of a probate administration in order to distribute it. An amendment to Nelson's living trust potentially could have accomplished the same end without exposing the funds to probate.

How do I create an estate plan?

There are numerous options and scenarios to consider when developing an estate plan that protects your legacy and achieves your objectives, and important decisions should be made with the advice of qualified lawyers and financial experts. Membership with Legacy Assurance Plan provides members with valuable resources and guidance to develop comprehensive estate plans that take life's contingencies into consideration and leave a positive impact for generations to come. Legacy Assurance Plan members also receive peace of mind that a team of trusted, experienced professionals will assist them in developing legal, financial and tax strategies that will meet their needs today and for years to come through periodic reviews.

This article is published by Legacy Assurance Plan and is intended for general informational purposes only. Some information may not apply to your situation. It does not, nor is it intended, to constitute legal advice. You should consult with an attorney regarding any specific questions about probate, living probate or other estate planning matters. Legacy Assurance Plan is an estate planning services company and is not a lawyer or law firm and is not engaged in the practice of law. For more information about this and other estate planning matters visit our website at legacyassuranceplan.com.

Phone - 844.445.3422
Email - info@legacyassuranceplan.com
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