MONEY MATTERS
After You’re Gone …
By Don Conrad and Hammid Firoozeh
It took 47 states to pass a transfer-on-death law before New York State, financial hub of the world, decided to give its own citizens the same benefit. We are still scratching our heads, wondering why it took so long, but on January 1, 2006, our state will finally join the club and add investment accounts (stocks, bonds, mutual funds, etc.) to the list of assets that fall under the category, Transfer on death.
Basically, the TOD law will make estate planning and the passing-on of investments to heirs much simpler and cheaper through the avoidance of probate. Probate is the often expensive and time-consuming process, following a person’s death, when his or her heirs must prove that the instrument purported to be a will was signed and executed in accordance with proper legal procedure. Every year the IRS collects about $30 billion in estate taxes through the probate process. TOD will not eliminate the entire burden, but its proper use will certainly help ease the load.
One Lower Manhattan couple will certainly benefit from this new law. When Carolyn and Simon visited us for the first time, Carolyn was just beginning to overcome the grief of losing her father six months earlier. At around the same time, Carolyn’s mother came to accept the fact that one day she too will pass away, leaving Carolyn and two other daughters along with seven grandchildren. The three daughters would become heirs to mama’s estate, and Carolyn (the oldest and closest to her mother) would probably assume the responsibility of dealing with most of the complexities. Within that same six months following the death of Carolyn’s father, her mother wanted to find an advisor who could help her and Carolyn coordinate all the details associated with her estate-planning needs.
Grandma found us.
The estate turned out to be fairly straightforward. After the inheritance from her husband, Grandma’s assets would still fall below the threshold amounts for estate-tax exemption ($1.5 million in 2005 and $2 million in 2006). It would therefore be unnecessary to set up trusts (often used to direct proceeds after death) or have guidelines for payouts in special-needs situations. Fortunately, Carolyn and Simon had been proactive about purchasing long-term care insurance for both Grandma and Grandpa, and were paying the premiums themselves because her parents didn’t have the cash flow to cover this expense. More than 80 percent of Grandma’s assets are stocks and bonds in a brokerage account, some of which are being held for as long as 30 or 40 years. Waiting until January 1, 2006, to do a TOD registration was a perfect fit.
Currently, accounts that are set up with the proper TOD registration allow beneficiaries (in New York State) to gain access with little delay to a number of investments after the account owner’s death. These include, but are not limited to, cash, bank accounts, savings bonds, life insurance, annuities, and retirement accounts. However, access to securities accounts still does not fit into this category. Until January 1, it is therefore mandatory for these accounts to undergo a lengthy and costly probate. After January 1, simply by requesting a TOD form from your advisor or mutual fund company, you as an account owner will be able to designate one or more beneficiaries, who will gain access to all of those accounts and assets almost immediately following your death – no probate period or estate taxes required. Yet the account owner will maintain 100 percent control over the account for the rest of his or her life.
“[The TOD] is a rather quick transfer,” says John M. McCabe, legislative director of the National Conference of Commissioners on Uniform State Laws. “It provides you with a lot of control over your account and simplifies your estate planning.”
Until now, New York State residents would often place their brokerage holdings in a joint account. The biggest potential problem with this was liability. For example, if you were holding assets jointly with your daughter, who was then in a serious car accident for which she was at fault, your brokerage account might seize your assets against potential lawsuits.
While we wait for January 1 to come around so new TOD forms can be filled out, we’re making sure Grandma is set with the rest of her estate needs. We’ve helped her update her will, along with her durable powers of attorney and her health-care proxy. We’ve also addressed many of her concerns about her investments along the way. We can’t bring Grandpa back. Still, Grandma seems gratified to have found a way to save her heirs thousand of dollars.
