Upon the death of the account owner(s), an account with a "payable on death" designation will automatically transfer to the beneficiaries as the new owners. It’s also referred to as a Totten trust. Many people use this as a way to simplify transfers of assets at death.
“Coe v. Schick, a case that was brought in Kentucky, centers around the use of a Pay on Death (“POD”) beneficiary designation. It shows the dangers of using the POD beneficiary designation, without consulting with a qualified estate planning attorney.
The bank account and a Certificate of Deposit (CD) were purchased by William in the name of his Trust. However, the problem was that his granddaughter Jennie was a named as the POD beneficiary. William’s pour-over will and trust left all of his assets to his two children Bill and Bonnie. The bank named as the trustee at William’s death negotiated the CD and moved its proceeds along with the checking account funds into a new, single trust account after his death.
However, Jennie asserted her rights to the CD and the bank account in William’s probate proceeding. The estate disallowed her claim and ultimately made final settlement and distribution.
After more than eight years of litigation, the Court of Appeals heard the case.
The Court held that a trust can’t have a POD beneficiary designation because a trust can’t die. The Court of Appeals found that the CD was a joint account. State statute defines an "account" as "a contract of deposit of funds between a depositor and a financial institution, and includes a checking account, savings account, certificate of deposit, share account and other like arrangement." A "joint account" is also "an account payable on request to one (1) or more of two (2) or more parties whether or not mention is made of any right of survivorship[.]"
Because the CD was issued to the Trust or Jennie alternatively, it was payable on request to either of them, the Court said. As a result, the CD satisfied the statutory definition of a joint account. The Court went on to explain that joint accounts payable in the alternative, like a CD, give the party who has possession the freedom to negotiate them, even to the detriment of the other party.
In this situation, the bank, as successor trustee, negotiated the CD and placed the funds in a separate account for the benefit of the Trust and its beneficiaries. The Court of Appeals found it proper for the trustee to dispose of the CD in this manner, even without Jennie's authorization or knowledge. The funds from the negotiation of the CD were the sole property of the trust and were to be distributed by the trust's terms.
The case cost the family years in litigation and more than $75,000 in legal fees to resolve a simple POD beneficiary designation. An experienced estate planning attorney will anticipate these kinds of mistakes and avoid the headaches and family turmoil that they create.
Reference: Justia (June 29, 2018) “Coe v. Schick”