The Difference Between a Trust and Payable on Death

In the past, a trust was something that seemed useless for many Americans. It was a term often used to refer to the bank accounts of wealthy individuals. However, trust can be useful tools for many individuals. You don’t have to be a millionaire to make use of them, either. They can be an effective part of a comprehensive estate planning strategy that help you provide your loved ones with financial security after your death. While trusts are much more accessible than they once were, there is still confusion surrounding them. Many people wonder why they need a trust if they have listed assets as payable on death to another individual. While payable on death accounts can be an effective way of naming a beneficiary for those accounts, there are some limitations that can be addressed by a trust.

Payable on Death Limitations

The largest limitation of a payable on death structure is that while it will allow you to name a beneficiary for the asset in question and thus avoid the need to probate such assets, it typically only allows title to the asset to pass upon your death. In other words, if you become incapacitated while still alive, the person the account is meant to pass to may not be able to access the asset. Additionally, not all types of assets can be listed as payable on death, which leaves things like personal property in limbo in case of your incapacitation or death.

You may be able to skirt this issue by drafting a power of attorney agreement that allows a designated individual to have access to these assets in the case of your incapacitation, but it is generally not accomplished simply by naming someone as a payable on death. Additionally, if you become incapacitated and need to access your finances for related medical care, a payable on death structure without other key components of an estate plan in place will limit the ability of loved ones caring for you to escape the high costs of medical care that could be related to your incapacitation.

Benefits of a Trust

A trust can help solve these issues by allowing you to establish circumstances under which your designated beneficiaries will be able to access assets within the trust. Perhaps most importantly, a trust allows you to transfer most types of assets to it depending on the trust’s structure. By creating a trust and funding it with assets you wish to distribute in case of death or allow access to in case of incapacitation, you can lump many of your assets into the trust and accomplish the goal of nominating a beneficiary for those assets by naming them as beneficiary for the trust. This can be especially useful if you are considering one or a handful of beneficiaries for your assets.

Keep in mind that there are also ways to modify or cancel revocable trusts if you retain the capacity to do so, which will allow you to make sweeping changes without having to worry about reorganizing all of the assets within the trust individually. Trusts can also help you avoid the need for probate when it comes to assets that might not qualify for payable on death structures. For more information on trusts in general or to find out what trusts might best suit your individual needs, speaking with an experienced estate planning attorney can help you understand the role trusts could play in your estate plan.