Benefits & Disadvantages Payable-on-Death (POD) Accounts

Payable-on-Death (POD) Accounts Explained

One of your goals in your estate plan should be to protect as many assets as possible from the probate court process. One tool you can consider is a payable-on-death account.

A payable-on-death account is a type of account where a client designates beneficiaries who receive all of the assets in the account at the immediate moment of the death. This agreement between the bank or credit union and the owner of the assets is easier to create than most trusts but still helps protect the assets from the probate court. Because this type of account is so easy to create and provide a measure of protection, these accounts are worth understanding.

How Do I Make a POD Account?

Designating a beneficiary in a POD account is very simple. All you need to do is fill out forms at your bank for the accounts you want to set up this way. There is no fee for this process. When you die, the beneficiary automatically becomes the account’s owner. However, the money could be used to pay creditors’ claims if you die with large debts.

What are the Benefits of POD Accounts?

When assets are in POD accounts, they are not subject to probate courts. The probate process can tie assets up for many months or even years, which can cost beneficiaries money. The POD account eliminates this risk.

Without probate, a POD account goes to the beneficiary soon after your death. This money can help with things like funeral or burial costs or outstanding debts.

It is possible to name multiple beneficiaries on a POD account, and this can be a benefit if it is something you need. Similarly, there is no limit on how much or how little the account holds. This is a flexibility that may not be available with other types of accounts.

Finally, POD accounts do not allow your beneficiaries to access the money prior to your death. If you are concerned about your beneficiaries pending your assets without your knowledge, this can be a perk.

Do Beneficiaries Pay Taxes on POD Accounts?

Yes, beneficiaries may have to pay inheritance taxes on a POD account in the way any other inheritance is taxed in their state. Only a handful of states charge this tax, and the tax does not apply if the POD account comes from your spouse, but this is a potential risk.

Beneficiaries may also have to pay federal and state estate taxes on the POD account funds. This is a different tax based on the amount of money in the account. If estate taxes apply to the account balance, having the money in a POD does not add any protection.

Does a Will Override a POD Account?

The answer depends on the state. Typically speaking, a POD designation on an account usually supersedes a will. If one person is listed on the POD account and a different person is listed in the will for that same asset, the beneficiary on the POD will receive the assets.

However, some states give heirs and creditors the ability to challenge the POD account in court. If the judge rules with the challengers, then the account is frozen, and the beneficiaries named on the account cannot take the money out. However, this is a rare instance, and typically, the POD is paid to the named beneficiary and is not part of the estate handled in the will.

What is the Difference Between a POD, TOD, and ITF?

POD accounts are sometimes confused with TOD and ITF accounts, and for a good reason. These are highly similar protections.

TOD means transfer-on-death. It works the same as a POD account, just a different name and for different accounts. Both a TOD and POD account automatically transfers to the beneficiary when you die, bypassing the probate courts. The difference is that a POD is often used for bank assets, while TOD applies to investment assets, but both terms can apply to most assets. ITF stands for “in trust for,” and it also transfers after death to the beneficiary named on the account. Different banks will use different words, but they act similarly.

If you are curious about PODs and whether they are the right option to protect your assets from the probate court, reach out to Heban, Murphree, & Lewandowski, LLC. We will help you with all of your estate planning needs, so you can move forward with a plan to protect your assets well.