Introducing a payable-on-death (POD) or transfer-on-death (TOD) designation to an account facilitates the transfer of assets (including money and property) in that account to a specified beneficiary upon the passing of the original account holder.
Similar to trusts, POD and TOD accounts circumvent probate procedures, offering a swift, uncomplicated, and often cost-free establishment process. However, they do not encompass the comprehensive benefits of a conventional trust and may entail unforeseen consequences.
Before determining whether to establish a POD or TOD account, it is crucial to grasp the distinction between them, weigh their advantages and disadvantages, and seek guidance from legal professionals regarding their alignment with your estate planning objectives.
POD vs. TOD (vs. Trust)
Payable on death (POD) and transfer on death (TOD) may sound foreboding, but they are essential terms in estate planning that financial account holders should understand.
One of the primary aims of estate planning is to sidestep probate, the legal procedure for settling an estate, which can be arduous and expensive. Methods to circumvent probate include placing assets in trusts that bypass the process altogether.
An alternative means of avoiding probate is by utilizing POD and TOD accounts for asset transfers. The key discrepancy between POD and TOD accounts lies in the nature of assets held within the account.
- POD is a label affixed to a bank account, including checking, savings, CDs, and money market accounts.
- TOD pertains to an investment account, such as IRAs, 401(k)s, brokerage accounts, and other securities holdings.
Another contrast between POD and TOD accounts lies in how they handle asset transfers: with a POD designation, assets are transferred to the beneficiary (or beneficiaries), while a TOD designation leads to ownership transfer to the beneficiary.
Both PODs and TODs can be revoked by the owner during their lifetime, up until their passing. Throughout the owner’s life, they maintain ownership and control over the account. Only upon the owner’s passing do beneficiaries gain entitlement to a TOD, POD, or revocable trust.
However, unlike a Totten trust or revocable trust, there isn’t a trustee overseeing a POD or TOD account. Instead, the assets in a POD or TOD account are directly transferred to the beneficiary. Assets transferred in this manner lack protection against a beneficiary’s creditors or their irresponsible spending habits.
Advantages and Disadvantages
It’s crucial to understand that in the scenario of jointly held accounts, the activation of a POD or TOD account designation occurs only after both account holders have passed. For instance, if spouses jointly possess a bank account designated as a POD account, the surviving spouse assumes sole ownership of the account upon the first spouse’s passing. It’s only after the surviving spouse’s passing that the account transfers to the named beneficiaries.
Other advantages include:
- The setup process is simple, typically incurring no cost.
- Designated beneficiaries receive funds promptly, bypassing the lengthy probate process which may take months, enabling loved ones to access funds almost immediately. Usually, providing only the death certificate and identification suffices for beneficiaries to claim funds from a POD or TOD account.
- Banks offer Federal Deposit Insurance Corporation (FDIC) coverage up to $250,000 for bank accounts, but account owners can specify multiple unique beneficiaries for an informal revocable trust (like a POD account), thereby increasing FDIC coverage.
- Account owners retain the ability to modify, add, or revoke beneficiary designations, offering flexibility.
- For additional flexibility, a durable power of attorney can be appended to a POD or TOD account, granting someone other than the beneficiary authority over the account.
- Trusts can also be designated as POD beneficiaries, providing another layer of estate planning flexibility.
Potential Pitfalls:
- A POD or TOD account lacks effectiveness if the owner becomes incapacitated.
- There’s no provision for naming backup beneficiaries; thus, if a beneficiary predeceases the account owner, their portion of the account could be redistributed to surviving beneficiaries or subjected to probate.
- POD and TOD accounts are established separately through a financial institution, operating outside the scope of the rest of the estate plan. Inconsistencies in the overall estate plan may arise if the will is updated without also updating POD or TOD beneficiaries.
- Since POD bank accounts bypass probate and transfer outside of the estate, the funds within them aren’t accessible to settle estate claims or debts, such as estate taxes. This can pose challenges for the executor, who may need to request voluntary contributions from POD beneficiaries.
- In scenarios where probate assets are insufficient to cover estate debts, creditors might be entitled to claim certain nonprobate assets, including POD and TOD accounts.
- A minor cannot inherit assets within POD or TOD accounts without a conservatorship.
What’s Right for You?
Estate planning is deeply personalized, reflecting individual preferences and family dynamics. There’s no universal solution; instead, the suitability of options like POD, TOD, trusts, wills, or power of attorney depends on your values and objectives.
While converting a bank or investment account to a POD or TOD designation can be straightforward, it’s essential to weigh the simplicity against financial considerations like taxes and personal factors such as whether trusts would better serve heirs.
Our team can guide you through the considerations of POD and TOD accounts in alignment with your broader estate planning goals. Reach out to begin planning today!
