Does "Payable on Death" Avoid Estate Taxes?

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Payable-on-death accounts are common estate planning tools. Accounts titled in this manner do not pass through the probate process, which means no estate tax is due on the funds. Accounts titled as payable-on-death have a named beneficiary on the account, so the funds immediately transfer to the beneficiary for use after death of the account owner.

Probate Process

When a person dies, his last will and testament is subject to probate, which is the legal process of settling a deceased person’s estate, including paying final debts and expenses and distributing property to heirs named in the will. Assets that pass through the probate process are those that are clearly in the name of the deceased without a determined beneficiary and are subject to estate tax.

Payable-on-Death Assets

Examples of payable-on-death accounts include insurance policies with a named beneficiary and bank accounts with a payable-on-death addendum to the account. To claim payable-on-death assets, a beneficiary simply needs to provide a certified death certificate, proof of his identity and a Form W-9 for tax reporting purposes to the financial institution. Since payable-on-death accounts are outside the probate process, no estate tax is due.

Operation of Law

Jointly titled accounts operate like payable-on-death accounts. By definition, standard jointly-titled accounts have a right of survivorship to the remaining owner, which means that when one owner dies, the surviving owner has the immediate right to the funds under operation of law. Many banks will title a joint account as payable-on-death to the surviving owner. As with specifically titled payable-on-death accounts, joint accounts are outside of the probate process and not subject to estate tax.

Ask the Executor

Any clearly titled payable-on-death account will not pass through probate, but if a beneficiary is not sure whether the probate process is required for an asset, he should consult with the estate executor or lawyer for the estate. A beneficiary does not want to be in a position of spending funds that should have passed through the probate process since probate estate assets and money are subject to estate tax.

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