MSU Extension Office: Alphabet Soup Estate Planning: FETs, MSAs, PODs, TODs, and BDs

This is one of a series of articles focusing on estate and legacy planning. Authors are Kaleena Miller, Madison-Jefferson County Extension Agent, kaleena.miller1@montana.edu, and Marsha A. Goetting, MSU Extension Family Economics Specialist, marsha.goetting@montana.edu.

During her estate planning meetings across the state, Dr. Goetting is often asked, "How do I avoid paying death taxes?" Dodging the Montana death tax is easy, says Marsha Goetting, MSU Extension Family Economics Specialist Goetting. Montana has not had an inheritance tax since 2001. Any property you own is no longer subject to an inheritance tax when it passes to your heirs. It does not matter whether your heirs live in Montana or out of state. You could leave each of your children or grandchildren as much as you want, and they will not have to pay an inheritance tax to the State of Montana.

Federal Estate Tax (FET): Avoiding the federal death tax is also “easy” for 99% of Montanans. Why? Unless your taxable estate is above $12,920,000 in 2023, you do not need to worry about paying the federal estate tax. However, if you are one of the one percent of Montanans who has more than $12.9 million, a possible estate planning tool that could be used is “to get married.” That is said tongue-in-cheek because having a spouse doubles the exemption amount to $24,840,000. Married couples with taxable assets valued at less than $24,840,000 would not have a federal estate tax due.

Two other tools that could be used to reduce the federal estate tax is to gift or bequest to a charity or non-profit, such as the Jefferson Valley Community Foundation. For example, if you are a single person and have assets valued at $13,920,000 you could gift $1 million ($13,920,000 - $1,000,000 = $12,920,000 or bequest the same amount in your will and draw down your estate where it would be less than the exemption of $12,920,000.

Montana Medical Care Savings Accounts (MSA): Another question people often ask is, “Is there an easy way to save Montana income taxes?” Kaleena Miller, Madison-Jefferson County Extension Agent responds with, “Have you deposited $4,500 in a Montana Medical Care Savings Account?” This action saves you $303.75 in state income taxes if you have taxable income above $21,600. The savings are there even if you don’t use any of the funds for eligible medical care expenses during the tax year. You can use a POD (payable on death designation) to list your children or your favorite charity as beneficiaries and they don’t pay income taxes either on what they inherit—as long as they use the amount in the MSA for medical expenses. The 2023 Legislature passed a law that allows MSAs past the year 2023.

If you are paying for medical expenses anyway, why not take advantage of an MSA and save income taxes at the same time? More information is in our MSU Extension MontGuide for 2023 at bit.ly/4662OkF.

Payable on Death Designations (PODs): You may have checking or savings accounts, certificates of deposit, or U.S. savings bonds. You can leave these accounts to whomever you want. It’s easy! Contact your financial institution to place a payable on-death designation (POD) to name your beneficiaries. Be prepared to list the Social Security number of each beneficiary. A POD allows you to keep control of the money in the accounts during your lifetime.

A POD beneficiary has no ownership rights in the account. After your death, the balance in the accounts passes to your POD beneficiary. There is no probate needed for financial accounts passing directly to POD beneficiaries. If you change your mind about your POD beneficiary, you simply fill out a new form with the financial institution and name a different POD beneficiary.

Transfer on Death Registrations (TODs): Owners of stocks, bonds, and mutual funds can also register a beneficiary to receive the title after death. A TOD form can be completed and kept with your issuer, transfer agent, or broker. A TOD beneficiary has no ownership rights in your securities while you are alive. Upon your death, the securities are transferred directly to the designated beneficiary.

TOD forms can be typically found on the website of the company where your account is held. Like the POD, assets in a TOD transfer directly to your beneficiary without probate. If you change your mind, just fill out a new form. Those inheriting your stocks, bonds, or mutual funds decide whether to keep the investments or to sell them after your death.

Beneficiary Designations (BDs): The Montana UPC also allows for the naming of family, friends, community foundations, charitable organizations, and nonprofits as beneficiaries on other financial accounts such as life insurance and annuity policies; qualified and nonqualified deferred compensation plans [401(k), 403(b), 457]; Individual retirement accounts (Roth and Traditional); and Employees benefit plans (SEPs, SIMPLEs) and Keogh retirement accounts. Downloadable beneficiary designation forms can often be found on the website of the company where the account is held.

In summary, Alphabet Soup includes placing beneficiary designations on a variety of your assets such as PODs on your Montana Medical Care Savings Account (MSA), checking accounts and savings accounts; TODs on your stocks, bonds, and mutual funds; and beneficiary designations on your life insurance and retirement plans.

More information is available at the MSU estate planning publications website at bit.ly/3LeiRFa. This has more information about the topics in this article: #1, #8, #29. For those who do not have computer access, copies are available from the Madison-Jefferson County Extension office at 406-287- 3282, reminded Miller.