(Article from Kiplinger's Retirement Report, January 2005)

WITH A LITTLE EFFORT, you can ensure that money you've tucked away in banks, savings and loans, and credit unions goes directly to your heirs when you die rather than through probate. You can accomplish the same direct transfer with stocks, bonds and mutual funds held in taxable accounts. Simply put your cash in payable-on-death accounts (PODs) and your investments in transfer-on-death registrations (TODs).

"People overlook a lot of really simple things they can do to avoid probate court that will make it easier for those who inherit their property," observes Mary Randolph, a lawyer and the author of 8 Ways to Avoid Probate (Nolo, $20). When a person dies, property that passes by will must go through probate. During this process, the person named as executor of the estate is approved by the probate court and acts under its supervision. IRAs and life insurance with named beneficiaries do not go through probate and generally pass directly to named beneficiaries.

POD FOR SAVINGS ACCOUNTS
Banks, credit unions, and savings and loans can help you set up a POD account or add the designation to existing accounts. There's no charge for maintaining POD accounts or for switching to one.

While you're alive, the person you name as your beneficiary has no claim to your cash. You can change your beneficiary at any time and name more than one. If the bank's rules permit it, name a contingent beneficiary in case your primary beneficiary dies before you.

After your death, your beneficiary can claim the money in the POD account simply by offering proof of identity and a copy of your death certificate. The only snag usually occurs in states that levy their own estate tax. In that case, the bank may not release the money until the state is satisfied that the estate has enough assets to pay any estate tax that is due.

A POD account is a better alternative than owning an account jointly with an heir, while accomplishing the same aim. Suppose a widow wants to leave her savings to her daughter, so she adds her to the account as a joint owner. The daughter now can legally withdraw part or all of the money without her mother's permission or knowledge. The widow's money could also be at risk if the daughter has credit problems.

TOD FOR INVESTMENT ACCOUNTS
Most states allow residents to use TODs to transfer stocks, bonds and brokerage accounts directly to heirs. To set up a TOD, you must register your securities or accounts in "beneficiary form." Contact your brokerage firm, mutual-fund company or financial adviser for the paperwork. If you own individual stock or bond certificates, you must request new certificates that show that you own the securities in beneficiary form.

A beneficiary has no right to TOD assets until you die. As with PODs, you can change beneficiaries, close the account, and use the assets as you wish. Each beneficiary will inherit an equal share of the assets unless you specify a different split. Some institutions, however, will allow only equal divisions.

Most brokerage firms, fund companies and corporations offer TODs, but they aren't required to do so. New York and North Carolina don't permit TODs. If you live in either state, you can establish a TOD if the financial institution's principal office is located in a state that does allow such transfers. You can also obtain one if the corporation issuing stock is incorporated in any of the other 48 states. You can add a beneficiary to a joint securities account, but only if you and your co-owner have a right of survivorship, so when the first owner dies, the survivor owns the account outright.

PODs and TODs are useful estate-planning tools, but be sure that the accounts you set up don't inadvertently sabotage your overall estate plan. For example, say your will stipulates to split your assets equally between your niece and nephew. Your estate consists of $100,000 in bank-sold CDs and $100,000 in stocks. At some point, you name your niece as the POD beneficiary of the CDs, but you don't change your will. The result: Your niece will receive $100,000 in CDs and $50,000 in stocks. Your nephew will receive $50,000 in stocks.