Who Pays Taxes on Payable on Death (POD) Accounts When the Owner Dies?

Are POD accounts taxable? Yes and no

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The beneficiary of a payable on death (POD) account can gain access to the money by simply presenting the account owner's original death certificate to the bank where the account is held. Probate isn't required and there's no limit to the amount of money or the number of accounts the owner can pass to a beneficiary in this manner.

But before you collect the money—or, worse yet, spend it—you should be aware of the tax and other consequences involved with inheriting a POD account.

Income Tax Consequences

The date of death value of the POD account generally will not be included in your taxable income because bequests aren't taxable as income.

Any income earned by the POD account prior to the date of the account owner's death will be reported on her final income tax return. Income earned between the date of death and the date you take over ownership of the account should be reported on the account owner's estate's income tax return. After that, the earnings become taxable to you.

Inheritance Tax Issues

Inheritance taxes are paid by the beneficiary. This means that you might well owe your tax on the value of the POD account that transfers to you, although it won't be an income tax and it depends upon where the decedent lived at the time of her death.

Only six states have an inheritance tax as of 2018: Nebraska, Iowa, Kentucky, Pennsylvania, New Jersey, and Maryland. Tax rates range from zero up to 18 percent in Nebraska. But there's a bit of good news here. The more closely related you are to the decedent, the less of a rate you'll pay.

In fact, surviving spouses are typically exempt from this tax entirely, and some states exempt the deceased's children as well. Those who aren't related to the decedent at all can expect to pay the highest rate.

The federal government doesn't have an inheritance tax. This tax is only imposed at the state level.

Estate Tax Consequences

Although POD accounts bypass probate, the decedent's probate estate and the taxable estate are two different things. His taxable estate is the value of everything he owned at the time of his death regardless of whether it requires probate to transfer to a living beneficiary.

If the account owner's estate is subject to federal estate taxes or state estate taxes and if he left a last will and testament or a revocable living trust, the provisions contained in the will or trust documents should indicate whether you'll be required to contribute to the payment of any estate tax bills. The estate is technically responsible for paying this tax, but this isn't to say that the deceased's personal wishes won't direct otherwise.

Only very wealthy estates have to worry about this, however. As of 2018, only estates with values over $11.18 million must pay an estate tax on the portion of their values over this amount. Fourteen states and the District of Columbia also have estate taxes, however, and some of their exemption amounts are much lower.

If the account owner did not have a will or trust, the laws of the state where the account owner died should dictate whether you'll be required to contribute to the payment of any estate tax that's due even though the asset wasn't part of the decedent's probate estate.

Will You Have to Pay Any of the Account Owner's Outstanding Bills?

A common question that comes up when the owner of a POD account dies is whether the POD beneficiary will be required to use any of that money to pay off the decedent's outstanding debts.

The answer to this question generally depends on whether the beneficiary is a guarantor of the debt, such as a co-signor on a credit card or mortgage. But it can also depend on state law.

In some states, the beneficiary will be able to have immediate access to the POD account if he's not a guarantor or co-signor of the debt. In others, a POD beneficiary might have to sign an affidavit confirming that the POD account owner did not have any debt prior to collecting the money.

Note: The information contained in this article is not tax or legal advice and is not a substitute for such advice. State and federal laws change frequently, and the information in this article may not reflect your own state’s laws or the most recent changes to the law. For current tax or legal advice, please consult with an accountant or an attorney.