Evans Legacy Law Group
Adding a payable-on-death (POD) or transfer-on-death (TOD) designation to an account allows the assets (money and property) in that account to be passed to a named beneficiary when the original account holder dies.
Like trusts, POD and TOD accounts bypass probate. They are also fast, easy, and usually free to set up. However, they do not provide the full range of benefits that a traditional trust does and can have some unintended consequences.
Before deciding whether to set up a POD or TOD account, it is important to know the difference between them, understand their pros and cons, and talk to an attorney about how they fit into your estate planning goals.
Payable on death and transfer on death sound ominous; and while the topic of death is always somewhat gloomy, POD and TOD are estate planning terms that financial account holders should be familiar with.
A goal of most estate plans is to avoid probate—the legal process by which an estate is settled. Probate can be time-consuming and costly, but there are ways to avoid it, such as placing assets in trusts that pass outside of probate.
Another way to avoid probate is to use POD and TOD accounts for asset transfers. The major difference between POD and TOD accounts is the type of assets held in the account.
An additional difference between POD and TOD accounts is that, with a POD designation, the account assets are transferred to a beneficiary (or beneficiaries), while with a TOD designation, account ownership transfers to a beneficiary.
Financial institutions may refer to a POD account as a Totten trust, a type of revocable trust (aka a living trust) that is set up as a POD account. PODs and TODs are, like Totten trusts, able to be revoked during the owner’s lifetime; that is, the POD or TOD designation can be removed up until the owner passes away. And with all three, while the owner is alive, they retain account ownership and can manage the account as they see fit. It is only when the owner dies that the beneficiaries have a claim to a TOD, POD, or revocable trust.
However, unlike a Totten trust or a revocable trust, there is no trustee who manages a POD or TOD account. The POD or TOD account or assets transfer directly to the beneficiary. Assets transferred in this way have no protection from a beneficiary’s creditors or their poor spending habits.
It is important to note that, in the case of jointly held accounts, a POD or TOD account designation does not kick in until both account holders have passed away. For example, if spouses jointly own a bank account that is set up as a POD account, the surviving spouse becomes the sole owner of the account when the first spouse dies, and it only passes to named beneficiaries after the surviving spouse dies.
Others benefits may include the following:
The probate avoidance offered by a POD or TOD account is its main appeal, but this and other benefits should be weighed against the following potential pitfalls:
An estate plan is a highly individual matter that reflects your personal wishes and family dynamics. As such, there is no “one size fits all” advice for an estate plan. The pros and cons of any estate planning vehicle—be it a POD, TOD, revocable trust, will, or power of attorney—must be weighed against your values and goals.
Transferring a bank account to a POD account, or an investment account to a TOD account, may be as easy as signing a document with your financial institution. But the ease of a POD or TOD designation must be considered alongside fiscal considerations such as taxes and personal considerations such as whether heirs would be better served by placing the accounts in a trust.
During a meeting with our estate planning attorneys, we can discuss POD and TOD accounts and how they may align with your overarching estate planning objectives. Call or contact us to start planning today.