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

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

The account owner can do what they please with the money held in the account during their lifetime. Then, at the time of 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 to provide a certified copy of the death certificate to the bank or financial institution, along with proof of identity to confirm that they are indeed the named beneficiary.

The account should already be set up to transfer directly to the beneficiary when this proof of the circumstances is provided. However, there might be a slight delay depending on the laws of the state where the account is located. Each state sets specific inheritance laws and these laws determine which items may end up in a probate court.

Don't Stop Estate Planning With a POD Account

Your estate planning may include the need for a last will and testament, a power of attorney, or an advance health care directive. In some cases, you may wish to build an irrevocable trust to pass funds to beneficiaries.

These documents will help to ensure that you, your property, and your beneficiaries are protected in case you become incapacitated. They will help make sure that your property will go where you want it to go after your death.

Possible Pitfalls

Setting up a POD account 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 such as creating a last will and testament. This false sense of security can lead to complications and unintended consequences.

Joint Accounts

POD accounts can also be set up as joint accounts. The funds would be payable to beneficiaries after both—or all in the case of multiple owners—of the joint owners die. But as long as one named account holder remains alive, that individual would effectively acquire full control of the account upon the death of other account owners.

Why a POD Account Does Not Replace a Will

Someone in a second marriage might set up a POD account that will convert to their children from their first marriages at their death. If the account is a joint account with the second spouse, the surviving spouse can simply change the POD beneficiaries to who they choose after the death of the spouse—in essence, disinheriting the children from the first marriage. Further, if the account is a joint POD, the surviving spouse could remarry and name the new spouse as a beneficiary. The surviving owner can even add beneficiaries, thereby reducing the share of the funds available to each named beneficiary.

In the Event of Mental Incapacitation

Should the POD account owner become incapacitated—and the account is held solely in their name—the family would have to go to court to establish a guardianship or a conservatorship to access the account. Accounts transfer only upon death and not mental incapacitation.

This should be a concern even if you're not elderly or have a family history of 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. However, the money contained in the account is passed to the beneficiary outright at the owner's death. It is then, therefore, susceptible to judgments and lawsuits just like any other owned asset the beneficiary has.

Your beneficiary could lose the entire bequest if you pass property to them in this way and they are sued. In this way, PODs differ from transferring money through a properly structured and protected "spendthrift" living trust.

Probate Can Still Be Required

If all of the named beneficiaries predecease the account owner and no new beneficiaries are added, the account will have to go through probate on the death of the owner. The probate court will determine who among the surviving family members will receive the sum remaining in the account. Probate and intestacy laws vary from state to state. This process can be time-consuming and costly.

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.