Pros and Cons of Payable-on-Death Bank Accounts

What Is a Payable-on-Death Bank Account?

POD accounts, also known as transfer-on-death accounts, are an important tool you can use for estate planning. POD accounts allow an account holder to designate a beneficiary or beneficiaries who can receive assets in the account with few, if any, complications after an account holder and remaining account co-owners die.

Here are some keys to how POD accounts work:

• You don't need a will or trust to set up a POD account. If you do have a will or trust, it normally won't interfere with the automatic transfer of a POD account to a designated beneficiary.
• There's generally no cost for an account holder to make a POD designation. There's also no cost to a designated beneficiary to receive money from a POD account.
• In some cases, you might not want to name a POD beneficiary for an account. For example, if someone receives government benefits that could be jeopardized by getting money from a POD account, you may want to reconsider naming them as a POD beneficiary.
• If you decide to change a beneficiary for a POD account, you're free to do it whenever you'd like, generally at no cost. However, you might be unable to change a beneficiary if you're incapacitated.
• If a POD beneficiary dies before the last account owner dies, POD arrangements should be updated. Otherwise, money in the account will often be distributed based on the account owner's will or trust, or on regulations in the owner's state.
• A beneficiary has no access to assets in a POD account while the account holder is alive. The account balance will only become available to the account beneficiary in the event of your death.
• To withdraw assets from a POD account, a beneficiary must provide a copy of the account holder's death certificate. The beneficiary also must show a form of identification to the financial institution where the account is located.

Keep in mind that POD rules vary from state to state.

What Types of Accounts Can Be POD Accounts?

Types of accounts that generally are eligible for POD designation include:

• Checking accounts
• Savings accounts
• Money market accounts
• Certificates of deposit (CDs)

These accounts can be individual personal accounts, co-owned personal accounts or small business accounts for sole proprietors.

Investment accounts and individual retirement accounts (IRAs) also may qualify for POD status.

Learn more >> What Happens to Your Bank Account When You Die?

Pros and Cons of Payable-on-Death Bank Accounts

Here are some of the advantages and disadvantages of payable-on-death bank accounts.

Pros

• Simple to establish: Naming a POD beneficiary for a bank account can be as easy as submitting a form to your financial institution. Plus, there's generally no cost to do it.
• No will or trust: No will or trust is required to set up a POD account. But similar to a trust, a designated POD account allows beneficiaries to skip the probate process to gain access to your account following your death.
• Easy for beneficiary: For a designated beneficiary, accessing your assets following your death usually involves providing a copy of your death certificate and the beneficiary's identification to the financial institution where your POD account is held.

Cons

• Potential lack of clarity: If there's a POD designation but no will or trust, there might be some confusion about who's supposed to cover funeral expenses, pay remaining debts and take care of other costs following the account holder's death.
• Possible conflict: If you designated someone as a beneficiary in your will but failed to designate them as a POD beneficiary, your wishes might not be followed. Why? Because a POD designation often takes precedence over what you put in your will.
• Potential taxation: While a beneficiary typically won't need to pay federal taxes on money in a POD account, they might be hit with an inheritance tax in the state where they live.

Payable-on-Death Account vs. Trust

Two estate planning tools that you can take advantage of are POD accounts and trusts.

A trust is a legal document that captures your wishes for distribution of your assets to people and charities following your death. It also helps protect your assets from lawsuits and creditors.

Similar to a POD account but unlike a will, a trust doesn't go through probate. However, setting up a trust can be pricey and time-consuming. By contrast, establishing a POD account involves little to no cost and is pretty easy to do.

Before deciding between a POD account and a trust, reach out to a financial advisor or attorney for guidance. You typically need to hire a lawyer to create a trust. Depending on the trust's structure, you may or may not be able to revoke it after it's set up.

Learn more >> Will vs. Trust: What's the Difference?

How to Set Up a Payable-on-Death Account

To designate a POD beneficiary for a new or existing account, you typically must fill out a POD form and submit it to the financial institution where the account is held. You may also be able to name a beneficiary when you open an account online. You generally can name a beneficiary for just one eligible account or all eligible accounts at a financial institution.

The Bottom Line

A POD account offers a no-hassle way for an account holder to designate a beneficiary or beneficiaries for the account's assets. Because a POD account doesn't go through the probate process, a beneficiary can easily withdraw assets from the account once the account holder and any remaining co-owners have died. Before choosing to create a POD arrangement, write a will or set up a trust, check with an attorney or financial advisor about the legal and financial implications.