Bank accounts, probate, POD’s: the pros and cons of pay on death designations
If you’ve been following my blog, you recently saw my post about using a transfer on death (TOD) car registration to bypass probate. A similar estate planning tool, the pay on death (POD) designation, exists for bank accounts. POD accounts — checking and savings accounts, money markets, and U.S. savings bonds can be set up this way — come with advantages. But they can also backfire, especially when they involve minors.
The POD process is free and easy: Your bank can provide you with a form that will allow you to name a beneficiary for your account. There is no limit on how much money you pass on via a POD account, and as long as you’re living, the inheritor has no access to your assets. You retain total control over the account, remaining free to close it, spend the money and change the name of the inheritor. After you die, the assets won’t have to go through the lengthy and costly process of probate. All your beneficiary needs to do to claim them is show up at the bank with your death certificate and an ID. (If you hold or held the account jointly with your spouse this applies after both of you have died, and the bank will ask for two death certificates.)
This all sounds good, right? Well, in situations where the family and inheritance structures are simple — an elderly widow with an only son — POD accounts are a beautiful tool. But often the reality is different. Let’s say your children are still minors. Leaving them money via POD accounts would be a bad idea because financial institutions don’t simply release funds to a person under 18. They require court orders or evidence of guardianship before handing the money over to an adult caretaker. Similar to probate, this process takes time and involves expenses, and in the end you’d have been better off passing on your assets via a living trust.
Speaking of revocable trusts, another word of caution: POD designations for bank accounts always take precedence over the provisions in a trust or a will. If you told the bank to hand the funds in your account over to your daughter upon your death, then that’s what’s going to happen, no matter what your trust or will says.
So what should you do? Is a POD account a good idea or not? As so often, it depends on your life circumstances. If you need help finding the best solution for your individual situation I advise you to contact an experienced attorney. Whatever you do, it’s a good idea to review all your estate planning documents every few years and particularly after a life changing event such as a marriage, a divorce or the birth of a child.
By Kevin J. Moore