Efficiency is one of the chief objectives of any solid estate plan. Well-planned transfers allow your loved ones to start benefiting from your assets with minimal delay. Cost-efficient planning maximizes assets available for inheritance by reducing transaction costs and administrative fees that might otherwise eat away at an estate. One way this efficiency can be achieved is by using automatic transfers upon death known as TOD and POD designations in Florida. Today’s article will define each of this strategies and provide some pros and cons of using them to avoid probate administration in Florida.
Non-Probate Transfers with TOD and POD Designations
Paradoxically, the probate process is often quite inefficient. Required formalities begin with admission of a last will and testament in Florida (or your home state) to probate and appointment of a personal representative in Florida (or your home state), followed by notices to creditors and resolution of estate claims, and concluding with distribution of assets to heirs only at the end of the process. Each step of the way, the circuit court supervises the proceedings and reviews mandatory reports filed by the personal representative. Even the simplest estate will likely take six months to settle, incurring administrative expenses and attorney’s fees throughout the process. Complex estates and estates that become entangled in litigation can go on for years, with commensurately increased fees.
Developing an estate plan that allows for transfer of some or all assets outside probate can be an effective way to streamline the estate process and maximize the value provided to loved ones. Even more, non-probate transfers generally don’t require publication, allowing personal matters to remain outside of public view.
Florida law recognizes several options for transferring assets outside of probate. Among the most popular are joint ownership, payment-on-death (POD) and transfer-on-death (TOD) designations, and Florida revocable living trusts. Each strategy has its pros and cons, and it often isn’t possible to avoid probate altogether. But, even if probate is necessary for other assets, a multi-faceted estate plan utilizing non-probate transfers may help to minimize costs and expedite the process.
Joint Ownership with Right of Survivorship in Florida
How assets are titled in Florida determines if they will transfer by right of survivorship. Jointly owned property is simply an asset with title held in the name of more than one person. “Right of survivorship” is a feature of some forms of joint ownership under which, when one owner dies, title to the asset automatically vests fully in the surviving owner. In Florida, jointly owned property with a right of survivorship is said to be held in a “joint tenancy.” A special category called “tenancy by the entirety” is reserved for married couples and also includes a right of survivorship. Conversely, jointly owned property with no right of survivorship is held in a “co-tenancy.”
Because property held in a joint tenancy or tenancy by the entirety automatically transfers fully to a surviving owner, these forms of ownership can be used to avoid probate.
For example, if you own a parcel of real estate which you want to leave to your son, you could record a deed transferring the property to yourself and your son as joint tenants with right of survivorship. Upon your death, undivided title automatically vests in your son with no need for administration in probate. A right of survivorship can also be designated on a joint bank account to avoid probate for the funds in the account.
The downside of joint ownership is that the co-owner generally enjoys equal rights to use and access the asset during life. With a joint bank account, for instance, either account-holder has the right to withdraw money, write checks on the account, etc. However, if the joint owner is someone you trust without reservation, joint ownership can be a handy estate-planning tool.
Defining Transfer-on-Death (TOD) and Payable-on-Death (POD) Designations
POD and TOD are similar designations under which title to an asset automatically vests in a named beneficiary upon the death of the current owner. In Florida, POD designations are commonly used for bank and money-market accounts and CD’s. TOD designations are used for stocks, bonds, and brokerage accounts. While there is a subtle legal difference between the two, in practical terms, they work in effectively the same way – after the owner dies, the asset belongs to the beneficiary with no need for probate.
The distinction between POD or TOD and a right of survivorship is that the beneficiary of a POD or TOD designation does not acquire any present rights in the asset during the current owner’s lifetime. So, if a bank account is jointly held by “Father Jones and Sonny Jones,” both Father and Sonny can access account funds during Father’s lifetime. But, if the account is held by “Father Jones p/o/d Sonny Jones,” Sonny doesn’t have any right to the funds until Father’s death.
In Florida, a POD account can name more than one beneficiary, in which case the beneficiaries are assumed to all share equally upon the account-holder’s death. Florida also recognizes POD designations in favor of entities, so they can be used to donate money to a charity outside of probate.
TOD designations are particularly important on retirement accounts in Florida because, under IRS rules, favorable tax treatment is only available when a retirement account is owned by a “natural person.” A decedent’s estate is not a natural person, so an IRA in Florida that becomes property of an estate (rather than a named beneficiary) is not eligible for extended withdrawals, which can result in big tax bills and potential attachment by creditors.
Some states allow TOD designations on real estate deeds, but Florida does not. However, Florida does recognize what are known as “Lady Bird deeds” (a/k/a “enhanced life estates”). An enhanced life estate deed a/k/a Lady Bird Deed in Florida works like a standard life estate except that the life-estate owner retains the right to control, sell, or otherwise use the property as he or she sees fit without any risk of liability to the holder of the future interest. If the parcel is still owned upon the death of the life-estate owner, the designated beneficiary takes title outside of probate. Lady Bird deeds are not all that common but can be very useful in both Medicaid planning and in minimizing or avoiding federal gift taxes.
Along with avoiding probate, POD and TOD designations have the advantage of being simple and inexpensive. To make the designation, you essentially only have to fill out a form with the bank or brokerage. You also retain the power to amend or revoke a designation, or to adjust the account balance, at any point. The downside is that POD and TOD designations are not customizable or useful with more sophisticated estate-planning strategies, such as special needs trusts. For that sort of thing, you need to go the old-fashioned route and use a will (but then you don’t avoid probate) or use perhaps the most versatile estate-planning tool of all – a revocable living trust.
Revocable Living Trust vs. TOD or POD in Florida
Also commonly referred to as an inter vivos trust or just a living trust, a revocable living trust is a method of ownership that allows you to avoid probate, retain effective control of trust assets during life, and direct how assets will be used or distributed after death. To form a living trust in Florida, you start by having a lawyer draw up a “declaration of trust” that sets forth the framework for management of the trust. You can name yourself as both trustee (the person who controls trust assets) and beneficiary (the person who benefits from trust assets) during life. And, you also name a successor trustee to take over management of the trust after death.
Once the trust is formed, you formally transfer into the trust whichever assets you choose. For real estate, this means deeding the parcel into the name of the trust. For a financial account, you transfer the account into the trust’s name (e.g., “John Doe as Trustee of the John Doe Revocable Living Trust”). At that point, the trust itself technically holds title to the assets, but, because you are the trustee, you still get to decide how they are used. This includes the power to transfer all trust assets back to yourself individually and dissolve the trust (hence, revocable living trust).
The declaration includes instructions for the successor trustee as to exactly what you want to happen to trust assets after death. The instructions can be simple – for instance, just telling the trustee to distribute individual trust assets to specified heirs. Or, they can be more complex. You might direct the trustee to transfer assets from the trust into a separate Florida special needs trust that benefits a disabled relative without jeopardizing his or her Florida Medicaid eligibility. The critical points are that (1) you retain effective control of trust assets during life, (2) trust assets do not need to pass through probate, and (3) you have significant flexibility in determining where trust assets go and how they are used.
Identifying Non-Probate Assets in Florida Estate Planning
It’s vital that strategies for transferring assets outside of probate in Florida complement an overall estate plan. Any contradictions or confusion among estate-planning instruments can lead to delay, expense, and litigation – defeating the whole purpose. For this reason, assets should be identified during the estate planning process as probate or non-probate.
As an example, say you execute a will that states your intention to divide your estate equally between your two adult children. And you also have a savings account designating one child as a POD beneficiary. Upon death, the POD designation takes precedence with regard to the account, and so it won’t be part of your probate estate. As a result, the POD beneficiary effectively receives a greater share of your total assets because the 50/50 split declared in the will only applies to probate assets. Now, if that’s what you want to happen, it’s probably not a problem. But if you really wanted an equal split, you’ll need to address the additional funds transferred through the POD account within your will. Either way, it’s better to make sure everything is spelled out to avoid the chance of costly and destructive litigation between your children.
Ultimately, the goal is to transfer all assets as efficiently and inexpensively as possible. For many people, this means employing some combination of joint ownership, POD and TOD designations, a living will, and a traditional last will and testament. Of course, the best strategy is not the same for everyone. An experienced Florida estate-planning attorney can help you develop an estate plan that makes optimal use of the strategies available under Florida law, considering your specific assets and goals, and the needs of your loved ones.
Steve Gibbs, Esq.