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A Payable on Death “POD” Account May NOT be Right for You . . . .

A question I often get asked is, “Why not just use Payable on Death (POD) or Transfer on Death (TOD) designations to pass on my assets and avoid probate?”

What is a POD Account?

A POD or TOD account is a type of financial account which allows the account owner to designate one or more beneficiaries to receive the funds left in the account when the owner dies. After the owner dies, if anything is left in the POD account, the beneficiaries chosen by the owner will be able to withdraw the remaining funds without the need for probate court. For the sake of this article, I’m going to use “POD” as a reference to both types.

What Can Go Wrong With a POD Account?

In general, POD accounts are easy to set up and make sense for many people. I do sometimes recommend this arrangement for certain clients. However, POD accounts may lead those who create them to believe that they have an “estate plan” and no additional steps will need to be taken. Below are just a few examples of what can go wrong with POD accounts:

  • Grandchildren Can Be Disinherited

Most clients prefer that if a child dies before them, then that child’s share will be split equally among the child’s children. With many institutions, though, it’s not possible to accomplish this on a POD form.

  • An Expensive Conservatorship May Be Needed

Even if it is possible on the POD form to designate the child’s children to inherit if the child dies before the client, if the grandchild is a minor, then a court-supervised conservatorship may need to be established to manage the minor’s inheritance. This can be an expensive and time-consuming process.

  • You Have an Understanding that the POD Beneficiary is to Use the Money for your Minor Kids

Maybe your kids are minors and you decide to name your brother as the POD beneficiary with verbal instructions that he is to use those assets for your kids. Your brother is under no legal obligation to do so. Also, what if you brother receives the money and then dies? Where does the money go?

  • Your Beneficiary Could Lose Eligibility for Benefits

If your beneficiary has special needs, receiving the account assets could jeopardize their eligibility for means-tested government benefits that they need to survive. Similarly, if your beneficiary goes into a nursing home before they receive the assets, the sudden influx of assets could cause them to lose their eligibility for Medicaid benefits to pay for the nursing home.

  • Blended Family Issues & Disinheritance

POD accounts can be set up as joint accounts that become payable on death after all of the owners die.

Let’s say that a husband and wife are in a second marriage and each has children from a prior relationship. They set up a joint POD account that will go to their various children after the second spouse dies. Assume the husband dies first – the account becomes the wife’s sole account and she then can simply change the POD beneficiaries to her own children and disinherit the husband’s children.

  • The Beneficiary is Incapacitated

If the POD beneficiary is incapacitated, then a court-supervised conservatorship will likely be needed to access the POD account.

  • Inconsistency with the Rest of your Estate Plan

We find that POD designations sometimes contradict what the rest of the estate plan says. For example, a client’s Will might say to divide their assets equally among all three of their children. But, if a POD designation only names one of the children as a beneficiary, the POD designation trumps the Will, and the other two children get nothing from that account.

These are just a few examples of why you may be concerned about using POD accounts as a primary asset transfer mechanism in your estate plan.

You need to have a Will, possibly a Revocable Trust, a General Power of Attorney, and at least a Healthcare Power of Attorney in place to ensure that you and your property are protected in case you become mentally incapacitated and to make sure that your property goes where you want it to go after you die.

Contact Hamrick Law to determine if making your account POD best fits your situation!


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