In the world of estate planning, I frequently see people looking for the “easy button.” The allure is understandable: everyone wants to avoid probate, save on legal fees, and keep things simple. Consequently, many people turn to Transfer on Death (TOD) or Payable on Death (POD) designations as their primary estate planning tool.
They think they are being efficient. I call this “piecemeal planning.” And in my experience, it is one of the most common ways to unintentionally sabotage your financial legacy.
When you slap a beneficiary designation on an account or real estate, you are making a localized decision in a vacuum, ignoring the global picture of your estate. Here is why I strongly advise against relying on these “blunt instruments” to transfer your wealth.
1. You Are Creating an “Empty Estate”
The most immediate problem with relying on TODs is that they bypass your estate entirely. While that sounds good in theory, you must ask: Who is going to pay the bills?
Your estate is a legal entity responsible for your final income taxes, funeral expenses, administrative costs, and outstanding debts. If you have designated every single liquid asset (bank accounts, brokerage funds) to pass directly to your children via TOD, your Executor is left with an “empty estate” containing $0.
I have seen this create unnecessary chaos. The child with the $500,000 cash inheritance has no legal obligation to pay your funeral bill or your final tax return. The Executor is then forced to chase down beneficiaries to “claw back” money to cover these costs—a perfect recipe for family resentment and litigation.
2. You Are Stripping Your Heirs of Protection
When you use a standard bank beneficiary form, you are leaving assets outright to your heirs. You are effectively handing them a check with no strings attached.
As an advisor, I believe in protecting beneficiaries, sometimes even from themselves. When you leave assets via a properly drafted Trust (rather than a TOD), you can ensure that the inheritance is safe from:
- Creditors: If your child has debt, a TOD inheritance can be seized immediately. A Trust can protect those funds.
- Divorce: Assets inherited outright are easily commingled with marital funds, making them fair game in a future divorce settlement.
- Bad Judgment: If a beneficiary has substance abuse issues or poor spending habits, a TOD is dangerous. It provides no mechanism for oversight.
My philosophy is simple: It is almost always better to leave assets in trust for the benefit of your heir, rather than directly to them.
3. The “Per Stirpes” Trap: How You Accidentally Trigger Probate
Many people believe that simply checking the per stirpes box on a beneficiary form solves the problem of a predeceased child. They think, “If my son dies, the bank will just write the check to his kids.”
This is a dangerous misconception. In reality, adding per stirpes to a non-probate designation often guarantees the very thing you were trying to avoid: court involvement.
Financial institutions are risk-averse; they are not private investigators, and they certainly do not want the liability of determining who your legal descendants are. If your child predeceases you, the bank will almost certainly refuse to release the funds to your grandchildren without a court order confirming exactly who the heirs are.
To get that order, your family will have to hire a lawyer and initiate a proceeding for a “judicial determination of heirship.” This forces them into the probate court system—incurring legal fees, court costs, and significant delays—just to satisfy the bank’s compliance department. In many jurisdictions, this process is actually more cumbersome and expensive than if you had simply died intestate (without a will). By relying on a per stirpes designation to bypass the system, you are ironically creating a more difficult, “worst-of-both-worlds” legal hurdle for your family.
4. The “Convenience” That Voids Your Will
This is perhaps the most critical misunderstanding I encounter: Beneficiary designations trump the Will.
You can pay an attorney to draft a sophisticated Will that divides your assets perfectly, sets up educational funds for grandkids, and accounts for taxes. But if you then go to the bank and add a conflicting beneficiary designation to your main account—perhaps just for convenience—that designation overrides everything in your Will.
The Will only controls the probate estate. By using TODs, you are removing assets from the probate estate and rendering your Will a worthless piece of paper regarding those assets.
The Superior Approach: Integration
You cannot view your estate as a loose collection of unconnected accounts. It must be viewed as a cohesive whole.
Instead of piecemeal planning, I advocate for an integrated approach:
- Use a Revocable Trust: If avoiding probate is your goal, title your assets in the name of a Revocable Trust. This serves as a “master set of instructions” that covers contingencies, protects heirs, and ensures debts are paid before distributions are made.
- Align the Designations: For assets that must have beneficiaries (like IRAs), we must ensure the primary and contingent beneficiaries align perfectly with the dispositive scheme of your Trust.
Beneficiary designations are free to fill out, but they are incredibly expensive to fix after you are gone. Do not leave your family a mess in the name of simplicity.
