Posts tagged Pay-On-Death
When do you need spousal consent to transfer assets with beneficiary designations?

There are a whole class of assets that pass without the need for probate, if you've properly named beneficiaries on those accounts. These include life insurance policies, pay-on-death accounts, and retirement plans (e.g., IRAs, 401ks, etc.).

If you acquired any of these assets during marriage, and absent an agreement between you and your spouse to the contrary, each spouse should have a 1/2 interest in each since they would be considered community property. Therefore, even if you've been funding your 401k plan at work with your salary, because that salary is considered community property, your spouse has a 1/2 interest in the account.

Because the law recognizes the community property nature of these assets, if you want to name a beneficiary for your 401k (other than your spouse), your spouse must consent and typically must also sign the beneficiary designation form waiving his or her right.

Check out California Probate Code Section 5020, which states:

"A provision for a nonprobate transfer of community property on death executed by a married person without the written consent of the person’s spouse (1) is not effective as to the nonconsenting spouse’s interest in the property and (2) does not affect the nonconsenting spouse’s disposition on death of the nonconsenting spouse’s interest in the community property by will, intestate succession, or nonprobate transfer."

If you're like many clients, you have probably never checked on the beneficiary designations on assets such as life insurance policies or retirement accounts since you acquired them. You might have acquired some of those accounts before you got married and named your parents or a sibling as the beneficiary.

Part of the estate planning process should entail you reviewing assets which are transferred by beneficiary designation to make sure they are up to date.

What are assets with beneficiary designations and how should they be treated?

One vital part of the estate planning process is making sure that assets with beneficiary designations are updated to be consistent with the other provisions of your estate planning documents. In general, this means that you want these assets to be distributed in a manner that is similar to how the other assets in your trust are distributed.

Assets with Beneficiary Designations

Generally, assets with beneficiary designations include life insurance policies, retirement accounts (such as IRAs and 401ks), as well as Pay-on-Death (aka "POD") accounts. 

Married Persons

In cases where spouses are married, it is often beneficial to have each spouse name one another as the primary beneficiary of retirement accounts. This gives a spouse the chance to inherit the other spouse's retirement account and continue the tax-deferred growth of that asset. In this scenario, usually the couples' joint living trust will be named as the secondary beneficiary on the retirement account.

Naming Minors as Beneficiaries

If your plan calls for naming minors as beneficiaries, you will want to make sure that the forms provide that the money will be held in a custodial account (often called "CUTMA" accounts) until a certain specified age (usually between 18 and 25). Without having such a provision, it's possible that a special person has to be appointed by a Court to receive and account for the money.

For some of you, especially those of you who have been diligent in contributing towards your retirement accounts, these types of assets can represent a significant portion of your assets. By planning properly, you not only ensure that the proper people receive these assets, but also significantly reduce potential tax consequences.