NOTE: State laws change frequently and the following information may not reflect recent changes in the laws. For current tax or legal advice, please consult with an accountant or an attorney since the information contained in this article is not tax or legal advice and is not a substitute for tax or legal advice.
If your loved one has died and you are the beneficiary of their payable on death (POD) account, then in general you will be able to access the money in the account by simply presenting the account owner's original death certificate to the bank where the account is held. However, before you collect the money (or, worse yet, spend it), you need to be aware of all of the tax and other consequences of inheriting a POD account.
Income Tax Consequences of Inheriting a POD Account
As the beneficiary of the POD account, in general the date of death value of the POD account will not be included in your taxable income. Nonetheless, any income earned by the POD account prior to the date of the account owner's date of death will need to be reported on the account owner's final federal income tax return (see IRS Form 1040) and any applicable final state income tax return, and income earned between the date of death and the date you take over ownership of the account will be need to be reported on the account owner's federal estate income tax return (see IRS Form 1041) and any applicable state estate income tax return.
Estate and Inheritance Tax Consequences of Inheriting a POD Account
If the account owner's estate is subject to federal estate taxes (in 2014, the gross estate must exceed $5.34 million in order to be subject to federal estate taxes) or state estate taxes or inheritance taxes and the account owner had a Last Will and Testament or Revocable Living Trust, then provisions contained in the will or trust will dictate whether or not you will be required to contribute to the payment of the estate or inheritance tax bill.
On the other hand, if the account owner's estate is subject to federal estate taxes or state estate taxes or inheritance taxes and the account owner did not have a will or trust, then the laws of the state where the account owner died will dictate whether or not you will be required to contribute to the payment of the estate tax or inheritance tax bill.
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 owing a significant amount of credit card or other debt such as medical bills or a mortgage is whether the POD beneficiaries will be required to use any of the POD money to pay off the outstanding debt. In general the answer to this question will depend on whether the beneficiary is a guarantor of the debt (such as a co-signor on a credit card or mortgage) as well as applicable state law. In some states if the POD beneficiaries are not guarantors or co-signors of the debt, then the beneficiary will be able to have immediate access to the POD account, while in other states each POD beneficiary may have to sign an affidavit confirming that the POD account owner did not have any debt prior to collecting the money remaining in the POD account.