A NEW FORM OF OWNERSHIP
In Pennsylvania, the law allows you to register your bank accounts and certificates of deposit so that your named beneficiary automatically becomes the owner upon your death. To achieve such a result, you simply open the account in your name, but list the account as being “in trust for” your beneficiary. With ownership in this manner, the account is owned solely by you while living, but it passes without probate to the “in trust for” beneficiary upon your death. If you wanted to do the same thing with your stocks, bonds or mutual funds, however, your options were limited. That is, to achieve a non-probate transfer with these assets, you either had to give up partial ownership while living, or you had to transfer the assets to a living trust. Now, however, a new form of ownership is available.
TRANSFER ON DEATH REGISTRATION
On December 18, 1996, Pennsylvania adopted the Uniform Transfer On-Death Security Registration Act. This law became effective in Pennsylvania on February 16, 1997 and it now permits all stocks, bonds, mutual funds, and other securities to be registered in “beneficiary form”.
Ownership in “beneficiary form” can be shown by the words “transfer on death” or the acronym “TOD”, or by the words “pay on death or the acronym “POD”, after the name of the registered owner and before the beneficiary. If titled in this manner, then the security passes to the beneficiary or beneficiaries who survive the owner and is not controlled by the terms of the owner’s Will. TOD or POD ownership has no effect on ownership until the owner’s death and the beneficiary can be changed or canceled at any time without the consent of the beneficiary.
PROPER PLANNING REQUIRED
The law is an attempt to simplify the transfer of securities when a person dies. In this respect, the law is certainly an advance. However, without proper planning, registration in TOD or POD form can create unintended consequences. For example, assume Mom has three children and has written her Will to leave her entire estate to her children in equal shares. If she has registered her stocks in TOD form with just one child named as beneficiary, that child will receive the stocks with no obligation to share them with her siblings. To add insult to injury, if Mom’s Will states that all death taxes are to be paid from her estate, then the estate (and not the beneficiary) will have to pay the taxes on the stocks that pass to the daughter named as the TOD beneficiary.
The law allows for all sorts of variations on the basic theme. For example, a husband and wife can register the account as “tenants by the entireties” with a beneficiary to take it after they both die. Also, you can name multiple beneficiaries, contingent beneficiaries and substitute beneficiaries, such as the grandchildren if a child named as beneficiary predeceases the owner. In addition, the trustee of a trust is a permissible beneficiary. These options create the flexibility to fashion the ownership to meet the specific needs at hand. However, this wide variety of options also makes it even more important to seek advice to ensure that the registration you select fits properly with your overall estate plan. Also, even though the law permits these options, not all brokers permit them.
DON’T FORGET THE TAX MAN
This Transfer On-Death Security Registration Act was kicked around in the Pennsylvania legislature for a few years before it passed. It finally passed, but only after language was added to make sure that the Pennsylvania inheritance tax would be paid on the securities before they were re-titled in the name of the beneficiary. To ensure that the tax gets paid, the Pennsylvania version of the law states that the securities cannot be transferred unless the inheritance tax has actually been paid, or unless 10-day advance notice of the transfer is given to the Pennsylvania Secretary of Revenue. Therefore, even though the law is designed to simplify transfers at death, this aspect of the law adds a procedure that hasn’t previously been a hurdle. Also, since the probate process in Pennsylvania is very easy to navigate and is not necessarily expensive or time consuming, placing assets in TOD registration generally achieves very little and can actually make the estate settlement process more complicated.