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To protect assets upon death, TOD’s the name
Want to avoid probate court administering your assets when you die?
Generally, assets titled solely in your name, with no joint owner and no associated beneficiary designation, will be subject to probate when you pass away. The main categories of assets that avoid probate are:
- Joint assets, titled in such a way to ensure the surviving joint owner or owners have rights of survivorship. They become the assets of the surviving joint owners by law.
- Life insurance proceeds or retirement benefits, assuming there are associated beneficiary designations. They are payable to the beneficiaries named in the contract.
- Trust assets. They’re held, managed and distributed by the terms of the trust.
- Assets with an associated Transfer-On-Death (TOD) beneficiary designation. They’re payable to the designated beneficiary.
Let’s explore TODs — sometimes referred to as “pay-on-death” or “PODs” — as a potential means of avoiding probate court administration of your closely held or family business interest.
By way of background, the Securities Transfer-on-Death Act became part of Michigan law in 1996. It authorizes the owner of a security to register it in beneficiary form so that the transfer on death is effective by reason of the contract regarding the registration between the owner of the interest and the entity.
Therefore, the transfer of the interest on death is not testamentary in nature, meaning it is not subject to probate.
The act broadly defines the term security as “a share, participation, or other interest in property in a business, or in an obligation of an enterprise or other issuer, and includes a certificated security, uncertificated security, and security account.” To register the security in beneficiary form means to “indicate the present owner of the security and the owner’s intention regarding the person who will become the security’s owner upon the owner’s death”.
Registering your closely held or family business interest in beneficiary form may be a useful estate planning tool for you.
The act specifically provides that such a designation does not affect ownership of the interest until the owner’s death. Therefore, with the use of TODs you are able to maintain your individual ownership of the interest during your lifetime while at the same time nominating an individual (or trust) to receive the asset upon your death free from probate administration.
One instance where this technique might make sense is if you and your spouse are establishing a joint trust through your estate plan. Joint trusts have become more popular due to the increase in the estate tax exclusion amount, which for 2016 is $5,450,000.
Many individuals no longer need to worry about estate tax liability on death but still wish to utilize the trust to transfer assets outside of probate on death. Typically, you and your spouse will be the grantors and trustees of your joint trust during your lifetimes, and the survivor will remain the trustee on the death of the first of you to pass.
If this is the case and you own your business interest in your individual name, then you may not wish to transfer your individual ownership to a trust in which the assets are controlled by both you and your spouse. There may be a number of reasons to maintain the interest in your individual name, including agreements between you and the other owners of the business which prevent such transfers.
Registering your interest in beneficiary form is fairly simple, assuming the entity’s governing documents allow for TOD registration. Such registration may be shown on the face of the applicable certificate by the words “transfer on death” or “pay on death” (or the abbreviations TOD or POD) after the name of the registered owner and before the name of the beneficiary.
You can name multiple beneficiaries for this purpose, and the interest will be reregistered in the beneficiaries’ names, with each owning an interest as tenants in common until division of the security among the beneficiaries is completed.
Notably, a registering entity is not required to offer or to accept a request for security registration in beneficiary form. Therefore, it is important that you talk to an attorney who will review your estate plan and governing business documents and advise whether you can use this tool.
Pam Cross is an estate planning and probate litigation attorney with Rhoades McKee.