Payable on Death Accounts

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 What is a Payable on Death Account?

A payable on death account, also known as a POD account, is a type of financial tool that is often used to keep monetary assets from entering into the probate system. The probate system is the legal process of administering a decedent’s estate. 

Are There Any Alternatives to Probate?

Yes, there are ways to avoid the probate process, and a payable on death account is one of those tools. An individual’s estate is considered includes all:

  • Belongings; 
  • Real property;
  • Assets, and/or
  • Funds. 

The probate process includes:

  • Determining whether the will is valid; 
  • Collecting all the individual’s assets; 
  • Paying off any outstanding debts and taxes; and 
  • Distributing the property to the deceased individual’s heirs or beneficiaries as outlined in the will.

Depending on the jurisdiction, the probate process may be complex and expensive. Costs may include:

  • Attorney’s fees;
  • Court costs;
  • Appraiser’s fees; and/or
  • Executor’s fees.

These fees can add up quickly and reduce the overall value of an individual’s estate.

The best way to avoid costs and fees associated with the probate process is to have a valid will in place when an individual passes away. The will provides specific instructions on the distribution of property. This is not necessarily an alternative to probate, but is the ideal standard for the distribution of an estate upon an individual’s death.

There are certain financial instruments that can be considered alternatives to probate. These allow property and/or funds to be passed to beneficiaries upon an individual’s death without the property and/or funds passing through the probate process. A POD account is one of these tools. Other examples may include trusts and joint bank accounts.

There may be other instruments available to transfer property to beneficiaries outside the probate process. Each may have its own benefits and drawbacks, which may differ depending on an individual’s intentions for their property.

For example, depending on the individual’s situation, a joint bank account may be able to accomplish an individual’s goals for their funds. In other cases, a POD account may be more suitable. The guidance and advice of an attorney can be very helpful in determining which tools are best suited for an individual’s intentions.

How Does a Payable on Death Account Work?

A POD account is often known as a “poor person’s trust.” A POD is usually used when the bank account holder provides directions to the bank to transfer the funds to another individual upon the death of the account owner.

The account owner will be able to access the account while they are still alive even if the POD arrangement has been made. The beneficiary, or recipient, of the funds will receive whatever funds remain in the account at the time of the account owner’s death. Payable on death accounts are also known as:

  • An informal trust;
  • A revocable bank account trust; 
  • A tentative trust; or 
  • In trust for, or ITF accounts. 

Another type of financial mechanism, known as a Totten trust, may be considered a payable on death account. To create a Totten trust, the account owner fills out forms at a bank for their account that turns their existing checking and/or savings account into a POD account. The account owner may close the account, withdraw all funds in the account, and/or change the beneficiary at any time. 

What if the Beneficiary Dies Before the Account Holder?

If the beneficiary of a POD account dies before the account owner, the account will pass into intestacy. These are the default rules on property after a property owner dies. These rules vary by state. The account owner may, of course, list another beneficiary if possible.

What if a POD Contradicts a Will?

It is important that a payable on death account does not contradict a validly executed will. Should the two documents contradict one another, litigation may result. For example, if a validly executed will states that the testator’s “entire estate shall be divided equally among my three children,” the children may litigate whether or not the POD was included in the will as part of the entire estate. 

If a POD account does contradict a will, the court will attempt to divide the estate based on the intent of the testator. Because of this, if the testator desires for the beneficiary of the POD to divide the account with other beneficiaries, the will should state so explicitly.

What About Debts, Funeral Expenses, and Estate Administration Costs?

Some payable on death accounts are processed quickly. These funds may serve as an excellent method of paying off estate debts, funeral costs, and/or executor fees. 

On the other hand, if an individual puts the majority of their funds into PODs, their estate may not have enough money to pay off debts, funeral costs, and or administrative costs. In these cases, a court may be forced to take money from PODs in order to pay estate expenses.

What Are the Advantages of a POD?

There are several advantages of a payable on death account. These accounts can accomplish the same transfer of funds as an expensive trust created by an attorney. 

One advantage of a POD account is it is easy to create. The account owner usually just fills out a form at their bank.

Another advantage of a POD account is the funds are transferred after the account holder’s death without passing through probate. Probate can be a lengthy process to confirm the validity of the will. The funds in a POD account are automatically given to the beneficiary by the bank upon the account holder’s death.

A third advantage of a POD account is that it is fairly simply to change the beneficiary at any time and for any reason. The account owner simply goes to the bank and fills out paperwork naming a new beneficiary.

A POD account can usually be divided between multiple beneficiaries. The funds can be split evenly, or however the account owner wishes.

Yet another advantage of a POD account is there are usually no limits to the amount of funds that can be transferred to a beneficiary. This may vary by state so it is important to review local laws.

Lastly, claiming the funds from a POD account is also simple. The beneficiary simply goes to the bank with a copy of the account holder’s death certificate and proof of their identity. In most cases, it is no more complicated than that.

What Are the Disadvantages of a POD?

A payable on death account does have some disadvantages. In general, it is not possible to name alternate beneficiaries to a payable on death account. 

Additionally, under most state law, an individual cannot disinherit a spouse. A POD account cannot be used to get around this law by putting all of their financial assets in a POD account and naming another individual as a beneficiary. In most states, the surviving spouse is legally entitled to a percentage of the deceased spouse’s estate.

Do I Need a Lawyer for a Payable on Death Account?

Yes, it is important to have the help of an experienced trust attorney when making any decisions regarding your estate. Even if the attorney does not set up a trust for you, they can review your will and any payable on death accounts and ensure they are not contradictory and your estate will be distributed as you intend. 

An attorney can also discuss your intentions for distributing your estate and determine whether a POD account would be advantageous for you. An attorney can ensure your estate, including property and funds, will be distributed according to your wishes.

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