It's common for people to use payable on death (POD) designations on their bank accounts. These POD accounts have several advantages that can make them useful estate planning tools. But POD accounts also have disadvantages under some circumstances.
A POD account (sometimes called a "Totten trust") is a type of bank account—like a checking account, savings account, or certificate of deposit—that has a "payable on death" designation. The POD designation names one or more beneficiaries to receive all of the account funds when the account owner dies.
A POD account is easy to create and free to set up. You can add a POD designation to any existing account by using your bank's online banking system or by submitting paperwork provided by your bank. The beneficiary of a POD account doesn't have to sign anything.
Claiming money in a POD account after the account owner dies is simple. Usually, all that the beneficiary needs to give to the bank is a certified copy of the account owner's death certificate and proof of the beneficiary's identity.
A bank account with a POD designation has some advantages over jointly held bank accounts and estate planning tools like wills and trusts. POD accounts generally are easy to create and allow account owners to keep control over account funds during their lifetimes. They have other benefits, too.
The primary benefit of using a POD account is to avoid probate on the transfer of the account funds to the named beneficiaries.
Probate courts oversee property that passes through a will or intestate succession. The probate process can be costly and lengthy. Especially when compared to a probate proceeding, transferring funds through a beneficiary designation is relatively quick and inexpensive.
If you're the sole owner of a non-POD bank account—one that doesn't designate POD beneficiaries—the account funds will go to the people named in your will after your death. If you don't have a will, your funds will be distributed according to your state's intestate succession laws. Either way, probate will be involved.
POD accounts generally can have more than one beneficiary, making one a good option if you want to split the money in an account equally between multiple loved ones.
If you don't want to split the money equally, state law might mean a POD account won't work for you. Some state laws don't permit POD accounts to have unequal distributions of funds. Bottom line: If you want to give beneficiaries different amounts with a POD designation, you should check your state's laws.
Another advantage of a POD account is that the account holder can revoke or amend it while alive. Unlike creating a new will, modifying a POD designation doesn't require witnesses.
You can change a POD account's beneficiary with a form from your bank. But you also might be able to quickly update beneficiaries from the comfort of your own home. Most banks allow account holders to change their POD designations through their online banking systems.
An account owner doesn't give up any control or rights to the account funds by using a POD designation. And the POD beneficiary doesn't have a right to access the funds in the account while the account owner is alive—and won't be able to empty the account behind the owner's back. The beneficiary's lack of control means that the beneficiary's creditors also can't claim any of the account funds while the account owner is alive.
Elderly people sometimes use jointly held accounts so the joint account owner—often an adult child—can easily access the account funds to help pay bills. As with a POD account, a joint account won't go through probate if one of the account holders dies—the money will just belong to the surviving joint account owner.
If you're choosing between a jointly held account and a POD designation, make sure to consider how much control you'd be comfortable giving away by using a joint account. After all, your joint account holder could use the account funds for any purpose without your consent.
Also, a jointly held account will be subject to the creditors of all account holders. So, even if your joint account holder is completely trustworthy, if they have debt, you could see your funds seized by their creditors.
If you have a trustworthy joint account holder who doesn't have debt problems, it's probably safe to go that route. Otherwise, a POD designation is likely the better option of the two.
POD designations do have some drawbacks when compared to other estate planning tools. When deciding whether to use a POD account, you should weigh its pros and cons while considering the other options.
Parents often list minor children as beneficiaries on POD accounts because they naturally want their children to be taken care of. Whether or not you're the parent, leaving money to a minor through a POD designation generally will keep those funds out of probate. But keeping the account's funds out of probate doesn't mean a court won't get involved.
As a general rule, financial institutions won't release a large amount of money (more than $2,500 to $5,000, depending on the state) to a minor beneficiary or the minor's parents. Before releasing large sums of money, financial institutions often require a parent (or another adult) to be appointed guardian of the money by a court.
To avoid court involvement, which can be expensive and time-consuming, you can choose someone to manage the money in a POD account in case your child is still younger than 18 when you pass away. One way to give another adult this authority is to name a custodian of the money under the Uniform Transfers to Minors Act (UTMA).
In this kind of setup, you can use a POD designation to name a custodian of the funds under UTMA. You'll need to make it clear that the minor is the beneficiary and that the custodian is to act on the child's behalf when using or managing the funds. When the child reaches age 18 or 21 (depending on state law), the custodian will turn over what's left to the child. To make sure you correctly designate a custodian, you should check with your financial institution to find out what language they prefer.
Another way to avoid court involvement when leaving POD funds to a minor is to establish a trust and name the trust (or trustee) the beneficiary of the account. A trustee generally will be able to get the funds from the financial institution without an expensive proceeding. The trustee will then be required to manage the money for the minor according to the terms of the trust.
A trust can require that funds be managed for the minor until an age well beyond 18. A trust also can require distributions of funds at different intervals—for instance, half of the funds at age 21 and half at age 30.
Trusts have another important advantage over POD accounts: They allow you to set money aside for specific purposes.
If all your money goes directly to beneficiaries when you die, there won't be funds specifically set aside to pay your estate's taxes and debts. Not having money reserved for this purpose could leave other assets, like your home, subject to your creditors. Often, in this kind of situation, one beneficiary ends up spending their own money from personal funds to pay your taxes and debts.
To avoid these complications, you can create a trust and have it take ownership of at least some accounts so that there will be enough cash in the trust to pay taxes and debts. Once your trust is funded with enough cash, if you want, you can use POD designations to transfer the funds in other bank accounts to beneficiaries.
A POD designation doesn't always reflect the account owner's current wishes for how the funds should be distributed. For instance, you could open a bank account and name your only child as a POD beneficiary. But what happens if you have another child five years later and forget to update your POD designation? If you were to die, your younger child would receive none of the account funds, even if your other estate planning documents called for equal distribution of your estate between your children. (As noted above, POD designations usually aren't hard to change, but people sometimes forget to take that step.)
POD accounts allow you to have more than one beneficiary, but they generally don't allow you to name contingent beneficiaries. A contingent beneficiary is an alternate choice in case your first choice can't be located or dies before you do.
If you use a POD designation to name a sole beneficiary but that person dies before you, the account funds will go into your probate estate—which will defeat the purpose of avoiding probate in the first place. If you name multiple beneficiaries and one dies before you, the other beneficiaries will split the account funds equally—and the heirs of the beneficiary who died before you will have no right to those funds.
For instance, you wouldn't be able to use a POD designation to have your son's daughter get your son's share if he dies before you. Instead, you would have to consider other estate planning tools—like a will or trust—to ensure that your granddaughter gets the money if your son dies before you.
As you can see, POD accounts have their advantages, but it's probably not the best idea to use them as your sole method of transferring money to your loved ones.