Trusts vs. Payable on Death Accounts
I am often asked why someone would need a trust if all of their accounts are payable on death? Both a trust and a payable on death account ate a good strategy to avoid probate because both designate who will inherit the account at the owners death. However, a trust can be a better option for two reasons.
The first reason is that a trust can provide much greater flexibility. For example, many banks will not allow you to designate more than one beneficiary or name contingent beneficiaies on an account. Therefore, if something happens to the beneficiary, and you are not able to name another, the account will end up in probate. Not only can a trust name numerous beneficiaries but it allows for multiple contingencies. As long as the account is titled to the trust it will be divided however the trust says.
Similarly, the beneficiary of a payable on death account must take possession of the funds within a certain amount of time following the owner's death. This means that if the beneficiary is going through a divorce or bankruptcy, the entire account could be lost to the beneficiary's creditors. By contrast, a beneficiary of a trust can elect to hold their inheritance in the trust for as long as is necessary to protect it from creditors.
The second reason is that a trust can provide for powerful estate tax savings options. However, accounts must be titled to the trust at the time of the first spouse's death to benefit from these options. Accounts that are payable on death will avoid probate but will not be eligible for estate tax protection.