People often ask me about Pay on Death (POD) or Transfer on Death (Transfer on Death) accounts (or they tell me of them after the fact which is worse). These are accounts which pay to a designated beneficiary outside of the probate process upon the presentation of a death certificate to the custodian. Probate is the process through which a court determines how to distribute property after an individual dies. Some assets are distributed to heirs by the court (probate assets) and some assets bypass the court process and go directly to beneficiaries (non-probate assets). A POD designation can be used on many bank accounts, investment accounts and other type of property ownership. These accounts are 100% yours while you are alive and then pass by operation of law upon death. If the named beneficiary predeceases the account owner, then the assets are distributed to the remaining beneficiaries or to successor beneficiaries, depending on what the owner writes on the beneficiary designation form. If there is only one beneficiary and he or she predeceases the owner, and the owner makes no changes to the beneficiary designation, the assets go into the account owner’s probate estate.
While the process is quick after death, there are a number of pitfalls that require someone to think seriously about using these types of accounts to convey your assets. First, if the account owner does not equalize transfers in other ways, the POD may unintentionally favor one loved one over another. A will does not control assets that pass outside of probate so if most of your assets are in bank account A and the POD beneficiary is one child, but your intent is to treat all three of your children equitably, than you may have unintentionally disinherited your other children. If the POD beneficiary is a disabled child receiving public benefits, a direct gift without certain provisions may disqualify the child from their Medicaid or SSI. If the child is a minor or not good with money, most financial institutions do not allow the POD designation to create trusts or place other restrictions on the disposition of the funds.
POD designations for small accounts may be part of an overall estate plan. However, POD accounts are not a comprehensive method of planning your estate and have many pitfalls that need to be considered.