The use of transfer on death and payable on death registrations for bank and investment accounts has increased dramatically. Banks and investment firms are pushing their clients to sign the forms claiming that the forms will eliminate the need for probate administration.
Chapter 633D of the Iowa Code deals with transfer on death registrations which applies to investment accounts. The Act allows the owner to designate the beneficiary of the account in the event of the owner’s death. The beneficiary form may be cancelled or changed at any time by the owner without the consent of the beneficiary. The Act further provides that if the assets of the deceased owner are insufficient to pay debts, taxes and expenses of administration, the transfer on death beneficiary form is not effective against the estate of the deceased owner to the extent needed to pay such items. The Act further provides that the beneficiary of a transfer on death account is liable to account to the personal representative of the deceased owner to the extent necessary to discharge debts, taxes and expenses of administration. An action for an accounting must be commenced within two years of the death of the owner. The Act further provides that the District Court in the State of Iowa shall have jurisdiction over a claim against a designated beneficiary brought by the decedent’s personal representative. It is important to point out that not all companies which provide transfer on death registrations allow for the distributions to be made on a per stirpes basis. The best way to explain per stirpes is by the following example:
If an owner named his two children as equal beneficiaries under a transfer of death registration and indicates that the distributions are to be made per stirpes, the result is that if one of the children predeceases the owner, the one-half share of the deceased child will pass on to the children of the deceased child, equally. If per stirpes is not selected or is not allowed by the Company, the result of the child predeceasing the owner will be that such child will be cut off and the entire account will go to the surviving child.
Section 524.805 of the Iowa Code sets out the payable on death provisions regarding bank accounts in banks chartered under Iowa law. The Act allows for a depositor to name a beneficiary of the funds in the account upon the death of the depositor. The Act provides that after payment by the State Bank, the proceeds shall remain subject to the debts of the decedent and the payment of Iowa inheritance tax, if any. The Act further provides that the State Bank, in paying the beneficiaries, shall not be liable for any debts of the decedent or for any estate, inheritance or succession taxes which may be due to the state. The Act requires the funds in the account to be paid to the beneficiaries who survive. As such, if the payable on death designation names three beneficiaries and only two survive, the entire account is split between the two surviving beneficiaries. By contrast, a transfer on death designation discussed above can be paid to a group of beneficiaries per stirpes, if the Company allows such, which means that if one of the beneficiaries does not survive, the deceased beneficiary’s share will be divided equally among his or her descendants.
A number of problems arise when a person dies with accounts passing by transfer on death or payable on death registrations. Such accounts do not automatically avoid probate. The decedent may own real estate or other assets in his or her name which will require the estate to be probated. If an estate needs to be opened, the transfer on death and payable on death accounts will become assets of the estate and will be included in the calculation of attorney fees and court costs. Another issue which often arises is that the use of such accounts will result in insufficient liquid assets in the estate to pay the debts, taxes and costs of administration of the estate.
The bottom line is that use of transfer on death and payable on death registrations need to be coordinated with the decedent’s overall estate plan. Decisions about the use of such accounts needs to be made by the attorney handling the estate planning. Bankers and investment advisors should not change accounts into transfer on death or payable on death accounts without first consulting an individual’s estate planning attorney. Even though the acts allow for a personal representative of the estate to recover funds paid to a beneficiary in order to pay the debts, taxes and costs of administration (TOD’s) and debts and inheritance taxes (POD’s), as a practical matter such action can only be accomplished by commencing a lawsuit and serving the same on the beneficiary who may be in or outside the state of Iowa. In many cases, the expense of bringing action will not justify seeking recovery from the various beneficiaries.
By James D. Beatty