Not all Banks are Created Equal

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When selecting a bank for estate planning purposes, one of the most critical factors to consider is whether or not the institution allows a Transfer on Death (TOD) designation to a trust. This seemingly small detail can make a significant difference in the efficiency and effectiveness of your estate plan. In my estate planning practice, I have observed that some banks, particularly larger national banks, are restrictive about TOD designations to trusts, while smaller banks and credit unions are generally more flexible.

For example, Bank of America (BOA) allows a TOD to be made to a trust, which can be a great advantage for simplifying the administration of an estate. However, Citizens Bank does not permit this option, which can introduce complications for estate planning clients. Understanding the nuances of TOD policies across different banks can help individuals and families make informed decisions, ensuring that their estate is managed according to their wishes without unnecessary obstacles.

The Importance of TOD Designations in Estate Planning

A Transfer on Death (TOD) designation is a simple and cost-effective way to pass assets to beneficiaries outside of probate. Typically used for bank accounts, investment accounts, and even vehicles in some states, a TOD allows for the direct transfer of assets upon the account holder’s death. This bypasses the often time-consuming and costly probate process, making it an appealing tool in estate planning.

However, when estate planning involves a trust, it is essential to consider whether the TOD can be directed to the trust rather than individual beneficiaries. By designating a trust as the TOD beneficiary, the estate’s liquid assets (cash) are funneled into one centralized place, which can be used to pay end-of-life expenses such as taxes, medical bills, and funeral costs. This method avoids the complication of distributing cash to individual beneficiaries who may then need to coordinate the payment of these expenses among themselves.

If a TOD directs funds to three children equally, for example, those children may need to come together to contribute their portions toward end-of-life expenses. This can lead to potential delays, disagreements, or unnecessary confusion. When all cash is distributed to the trust, the trustee can easily use those funds to settle the estate’s obligations in a more organized and efficient manner. This is why the ability to direct TODs to a trust is vital in estate planning and why it is important to choose a bank that supports this strategy.

The Flexibility of Smaller Banks and Credit Unions

Smaller banks and credit unions tend to offer more flexibility when it comes to estate planning strategies, including TOD designations to trusts. Many of these institutions allow customers to name a trust as the TOD beneficiary, which can greatly simplify the estate administration process.

One reason smaller banks and credit unions are more accommodating could be that they are less rigid in their internal policies compared to large national banks. These smaller institutions often emphasize personalized customer service and may be more willing to work with customers to meet their specific estate planning needs. For estate planning purposes, having a bank that is willing to facilitate a TOD to a trust can save significant time and prevent potential complications later on.

Larger Banks: More Restrictive Policies

In contrast, many larger national banks are more restrictive with TOD designations to trusts. While Bank of America is an exception, many big banks do not permit a TOD to a trust, requiring customers to name individual beneficiaries instead. This can create logistical challenges in estate administration, particularly when large sums of money are involved, or when a trust is the primary vehicle for managing and distributing assets after death.

The reason for these restrictions often lies in the institutional policies of large banks, which may be less flexible and more standardized across their branches. These banks may require additional legal documentation or have policies in place that limit how TODs can be used, especially with more complex estate planning tools like trusts. For individuals and families looking to streamline their estate plans, this rigidity can pose an unnecessary burden.

Why Choosing the Right Bank Matters

Choosing the right bank for estate planning purposes can have a profound impact on the ease of administering an estate after death. A bank’s policy on TOD designations, particularly whether they allow a TOD to a trust, can either streamline or complicate the process of managing and distributing assets.

From my experience, the best banks for estate planning are typically smaller institutions and credit unions, which offer the flexibility to name a trust as the TOD beneficiary. This makes it much easier to handle the financial responsibilities of settling an estate, such as paying taxes, medical bills, and funeral expenses. Larger banks, while often more accessible due to their size and widespread presence, can sometimes hinder estate planning goals by imposing restrictions on TOD designations.

The Bottom Line

When creating an estate plan, it’s essential to choose a bank that supports your specific needs and goals. For individuals who plan to use a trust as the primary tool for managing their estate, selecting a bank that allows a TOD to the trust is critical. Smaller banks and credit unions typically offer more flexibility, while larger national banks may have more restrictive policies that could complicate estate administration. By choosing the right financial institution, you can ensure that your estate plan will work as intended, with minimal complications for your loved ones after you are gone.

In short, don’t overlook the importance of banking policies when it comes to estate planning. Ensuring that your bank allows a TOD to a trust can save your family time, stress, and unnecessary legal hurdles during what is already a difficult time.