Many of my clients ask me about using Payable on Death (“POD”) accounts. While these can be very useful tools, I have seen some very problematic results that clearly were not what the client intended. Understanding the benefits and drawbacks of POD accounts can help you decide if they are the right choice for you.

What is a Payable on Death (POD) Account?

A POD account is a type of bank account that designates a beneficiary to receive the funds upon the account holder’s death. It bypasses the probate process, allowing for a straightforward transfer of assets to the named individual.

Pros of Payable on Death (POD) Accounts

Avoidance of Probate: People like POD accounts because the account passes outside of probate. With a POD account, the designated beneficiary gains immediate access to the funds without legal delays. That can be particularly beneficial in covering immediate expenses such as funeral costs, probate fees, or other immediate needs of the beneficiary. However, it can have unintended consequences as well (as discussed below in “Cons”).

Simplicity and Cost-Effectiveness: Most banks and financial institutions readily allow you to designate a beneficiary, making it a hassle-free way to manage part of your estate.

Privacy: Probate proceedings are public, meaning anyone can access information about your estate. In contrast, POD accounts offer a level of privacy, since the transfer of assets occurs directly and is not subject to public record.

Cons of Payable on Death (POD) Accounts

Limited Scope/Still Have Probate: POD accounts are limited to certain types of assets, such as bank accounts and certificates of deposit. Therefore, they will not completely avoid probate for most individuals who own real estate and investments.

Lack of Coordination with Will: If a POD account is not coordinated with the Will, conflict can result. Since POD accounts fall outside of the Will, they may be inconsistent with, and therefore disrupt, the intended overall distribution plan the Will sets out. Clear communication and comprehensive estate planning are necessary to avoid conflicts.

Tax Issues: While POD accounts avoid probate, they do not avoid taxes. The beneficiary may still be liable for estate or inheritance taxes. This can cause problems, as the Executor may be forced to attempt to recover funds paid out to POD beneficiaries so as to pay the estate or inheritance tax owed on the funds the beneficiary received. It is best to ensure that sufficient funds flow into the probate estate to address any tax obligations, as well as to clearly state whether you intend for the estate or the individual beneficiaries to be responsible for the taxes.

Depletion During Lifetime: POD beneficiary designations come into play only upon death, so the account owner may very well deplete the funds during his/her lifetime. Regular review is needed to ensure that your comprehensive estate planning goals are met through the appropriate allocation of probate assets and non-probate assets such as POD accounts.

Conclusion

Payable on Death accounts can be a valuable part of your estate planning toolkit, offering simplicity, privacy, and quick access to funds for your beneficiaries. However, they come with limitations and potential risks that must be considered. Combining POD accounts with other estate planning tools, such as wills, trusts, and powers of attorney, can help ensure a comprehensive and effective plan for managing and distributing your assets. Regular review with your estate planning attorney is key to ensuring that your comprehensive estate planning goals are met through the allocation of probate assets and non-probate assets such as POD accounts.