If you are in the process of planning your estate, it will be helpful to have an understanding of payable on death accounts. Here's what you need to know.
Head of Legal , Trust & Will
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Payable on Death (P.O.D.) accounts can be a great option if you want to set up an easy, seamless way for assets in a bank account to transfer to the beneficiary of your choosing after you pass away. Also commonly referred to as a “Totten Trust,” a Payable on Death account can be set up at most financial institutions for checking and savings accounts, Certificates of Deposits (CDs), money markets and savings bonds. They’re generally accepted under state law.
If you’ve been looking for a way to set up your estate to make things easier on your loved ones after your passing, you may want to consider opening or transferring existing bank accounts to be Payable on Death.
Learn more about how these accounts work, what they actually mean, some benefits and drawbacks, and most importantly, how to set up a Payable on Death account here.
Payable on Death (P.O.D.) means exactly what it sounds like. It’s simply a type of account that becomes payable to someone else (the beneficiary you name) upon your passing.
A Payable on Death account is essentially created when you make an agreement with your financial institution. This formal, legal agreement tells your bank who they should hand your money over to after you pass away. The agreement ensures your intentions are documented and known through a Payable on Death form or beneficiary designation form that’s filled out and kept on file with the bank.
With the form filed, the bank has a legal document clearly stating who you named as beneficiary (who should inherit the money in your account). P.O.D.s typically override a Will or any other financial Estate Planning document (such as a Trust).
There are a number of reasons why P.O.D. accounts are advised and can be beneficial.
Of course, as with most things, there are some drawbacks to P.O.D. accounts, too.
Because there are both pros and cons to Payable on Death accounts, it’s wise to try and understand as much as you can about them before you decide to open one.
In short, yes a P.O.D. account is a good way to bypass the often complex and stressful probate process. This is because when the original account owner passes away, it triggers an automatic new ownership to the named beneficiary. Since the account is retitled immediately upon death, technically it’s not in the original owner’s Will, so it isn’t subject to probate.
Typically, it’s very easy for a P.O.D. beneficiary to get control of the account. With just an original death certificate, as long as the beneficiary designation form was properly filled out and filed with the bank, your beneficiary should quickly have access to any remaining money in the account.
For more information on probate and how to avoid it, check out our in-depth article What is Probate and How to Avoid It
Taxes always seem to be a bit confusing, but there are a few key things to note regarding P.O.D. accounts specifically.
Payable on Death and Transfer on Death (T.O.D.) accounts are similar in their intention and purpose. Both are set up to simplify the process of getting assets to a beneficiary after the original account owner passes away.
The difference is that T.O.D. accounts refer to stocks, bonds or brokerage accounts, whereas P.O.D. accounts are bank assets.
Again, just like T.O.D. accounts, Payable on Death accounts are set up to ensure a beneficiary receives money from an account quickly and easily. While P.O.D. accounts do have beneficiaries, the term “beneficiary” itself is also commonly used for different account-types and assets.
Usually, retirement accounts like 401(k)s or IRAs, as well as life insurance policies and annuities would have named “beneficiaries.” P.O.D. accounts are opened on bank assets (like money markets, savings and checking accounts and CDs).
In Trust For (ITF) accounts vs Payable on Death accounts can be easily understood if you think about them like this: an ITF account has a Trustee, whereas a P.O.D. account has a named beneficiary.
With an ITF, the original account owner and the Trustee both technically own the funds in the account, even while you’re still living. By contrast, the beneficiary of a P.O.D. doesn't have any rights to your account until you pass away.
Setting up a Payable on Death account is very simple. Doing so takes just a matter of minutes, and can be an easy way for you to ensure your loved ones avoid probate. And of course, the main benefit, as we’ve discussed, is you make it seamless for someone to inherit your account, virtually giving them immediate access to some or all of the money you hold in basic bank accounts.
To open or set up an existing bank account as ”Payable on Death,” simply follow the steps below:
While some people try to do this process on their own by using a makeshift form or by putting direction in their Will, using an official Payable on Death form that’s bank-specific is really the only way to ensure you avoid any potential complications for your beneficiary.
The whole point of Estate Planning is to make things easier on your loved ones after you pass away. Setting up a P.O.D. account is one way to accomplish that goal. And though you may not want to be thinking about that inevitable time, you might just find it gives you incredible peace of mind knowing that you’ve taken one small step towards easing any extra burden on your loved ones by creating a P.O.D. account.
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