Often called a "poor person’s trust," a payable on death account (POD) is simply a bank account accompanied with instructions to the bank to transfer the account to a specific person after the death of the account holder.
What If the Beneficiary Dies Before the Account Holder?
If the recipient of the account dies before the account creator does, the account will go into intestacy, a state's default rules on property after the property owner dies.
What If a POD Contradicts a Will?
It is crucial that PODs do not contradict a validly executed a will, since that will result in unwanted litigation. For instance, if a will states that "my entire estate should be divided equally among my three children," the children will fight over whether the will included the POD as part of the "entire estate." If a POD does contradict a will, the courts will attempt to divide the estate based on the intent of the will’s creator.
If the will’s creator intends for the beneficiary of the POD is divide the account with other beneficiaries, the will should explicitly state so.
What About Debts, Funeral Expenses, and Estate Administration Costs?
Since PODs are typically processed quickly, an excellent method of paying off debts, funeral expenses, and executors.
On the other hand, if an estate puts most of its funds in PODs, the estate might not have enough to pay off debts, funeral and administrative costs. In this situation, courts may be forced to extract money from PODs in order to pay for those expenses.
What Are the Advantages of a POD?
This can be accomplished – for very little money, or for free – essentially the same thing as an expensive trust written up by a lawyer.
This also has the advantage of transferring money after death without going through probate – the (often lengthy) legal process by which a will is confirmed to be valid. When the account holder dies, the bank simply hands the money over to the named beneficiary.
Furthermore, it is fairly easy to change the beneficiary of a payable on death account at any time, for any reason. One simply needs to go to the bank and fill out the paperwork naming a new beneficiary.
Claiming the money from a payable on death account is fairly simple – the beneficiary simply shows up to the bank with a copy of the death certificate and proof of identity. It is usually no more complex than that.
What Are the Disadvantages of a POD?
This setup does have some disadvantages. Generally, it is impossible to name alternate beneficiaries in a payable on death account. Also, under most state laws, a person cannot disinherit a spouse. A payable on death account cannot be used to get around this by putting all financial assets in an account and making it payable to someone else. In most states, the spouse is legally entitled to a certain percentage of the other spouse’s estate.