Is a Payable on Death (POD) Account Right for You?

These Accounts Are Easy But Have a Few Shortcomings

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A payable on death (POD) account allows the account owner to designate one or more beneficiaries to receive the funds in the account at the time of her death.

The account owner can do what she pleases with the money held in the account during her lifetime, then, at the time of her death, the designated beneficiaries can withdraw the funds remaining in the account without the need for probate.

While POD accounts have certain advantages, it's important to know all of the issues that could arise from the use of this estate-planning tool.

Claiming the Account

Ownership of a POD account transfers somewhat automatically to the living beneficiary when the account owner dies. The beneficiary needs only provide a certified copy of the death certificate to the bank or financial institution, along with proof of her identity to confirm that she is indeed the named beneficiary.

The account should already be set up to transfer directly to her when this proof of the circumstances is provided, but there might be a slight delay depending on the laws of the state where the account is located.

Possible POD Pitfalls

It all sounds very easy, and it is. POD accounts are simple to set up and they make sense for many people. A handful of states even recognize POD deeds for real estate and POD designations for automobiles.

But these types of accounts can also lead those who establish them to believe that they've done all their estate planning so there's no need to take any additional steps. And this can lead to complications and unintended consequences.

Joint POD Accounts

POD accounts can be set up as joint accounts. The funds would be payable to beneficiaries after both or all of the joint owners die. But as long as one remains living, that individual would effectively inherit full control of the account upon the other's death.

Spouses in a second marriage might set up a POD account that will go to all their children from their first marriages after both of their deaths. A surviving spouse can simply change the POD beneficiaries to her own children after the first spouse dies and disinherit his children—or at least cut them out of any right to the account's funds.

She might also remarry and decide to name her new spouse as the POD beneficiary, thereby disinheriting both her own children and her deceased spouse's children as well. She could add him as a beneficiary, reducing everyone's share of the funds because it would be divided with one more person.

In the Event of Mental Incapacitation

Should the POD account owner become incapacitated and the account is held solely in his name, his family would have to go to court to establish a guardianship or a conservatorship to access the account. It only transfers upon his death.

This should be a concern even if you're not teetering on the edge of old age and potential dementia. Incapacitation can result from an unforeseen accident or illness. Your beneficiary will be unable to access the money in the account to pay for your care without court involvement because a POD account doesn't act as a joint account during the account owner's lifetime.

When the Beneficiary Has Credit Issues

A POD account isn't vulnerable to a beneficiary's creditors—or to his spouse in the event of a divorce—while the account owner is still alive. But this changes upon the account owner's death.

The money contained in the account is passed to the beneficiary outright and is therefore susceptible to judgments and lawsuits just like any other asset he might own. Your beneficiary could lose his entire bequest if you pass property to him this way, unlike if you had transferred the money to him through a properly structured and protected "spendthrift" living trust.

Probate Can Still Be Required

The account will have to be probated if all of the POD beneficiaries predecease the account owner. A new beneficiary can easily be added, however, to replace the deceased individual. In fact, the account owner can remove a beneficiary any time she likes, even if the beneficiary doesn't predecease her. It's just a simple matter of filling out a new form.

Don't Stop Estate Planning With a POD Account

These are just a few examples of why POD accounts should not be the sole extent of your estate plan. You might very well need a last will and testament, a power of attorney, or an advance health care directive as well. This will ensure that you and your property are protected in case you become incapacitated and that your property will go where you want it to go after your death.

Always consult with an attorney for the most up-to-date advice. The information contained in this article is not intended as legal advice and it is not a substitute for legal advice.