Payable on death account pros and cons must be considered before opening an account so that you know what to expect. You should work with an estate-planning lawyer to weigh the advantages and disadvantages bearing in mind your other options for estate planning and avoiding probate.
Payable on death account might be a good idea for people who do not have a life insurance policy and want to set aside a modest amount of money that a beneficiary might need right after his passing.
For example, an elderly parent might set up a POD to make sure that one of his children will have the money to fund a funeral and handle other immediate expenses. By having access to a POD account, the beneficiary can avoid probate which is a long and expensive process.
In this article, we will explore the pros and cons of payable on death account to learn if this is the best option to avoid probate.
WHAT IS PAYABLE ON DEATH ACCOUNT?
A payable on death account or POD is a special type of bank account that is recognized under United States state law. POD accounts can be set up for savings accounts, checking accounts, money markets, and savings bonds as well as certificates of deposit.
A POD offers an easy way to keep the money – even a large sum out of probate.
This kind of account is also called the “poor man’s trust.” And it’s true that a free payable on death account assignment avoids probate just as well as an expensive attorney-drawn living trust would.
Upon the death of the account holder, the funds pass directly to the named beneficiary. It will happen outside of probate, and in general to gain control of the account after the owner dies the beneficiaries need to show the bank manager an original copy of the death certificate of the owner. The money remaining in the POD account will then be paid to the beneficiaries named on the beneficiary designation form on file with the bank.
As a general rule, a POD account can have more than one beneficiary. However, if the account owner wants each of his beneficiaries to receive unequal portions of the funds in the account, he must check if the state laws allow it, given that some states only permit an equal distribution of funds in a POD account.
It is important to note that the bank account will pass to the POD beneficiaries even if the account owner had a last will and testament or revocable living trust and will take precedence regardless of what the will or trust says.
A POD account is more powerful than the last will and testament. It is not required to honor the owner’s last will and testament, therefore, it’s essential that the owner ensures to change or cancel the POD beneficiary if he has someone else listed on his will.
As long as the owner of the account is alive, the beneficiary named to inherit the money in a POD account has no rights to it. If the owner needs the money, or just changed his mind about leaving it to the beneficiary he named, he can spend the money, name a different beneficiary, or close the account.
HOW CAN MY BENEFICIARY CLAIM THE MONEY?
The POD beneficiary you name has no rights to the money as long as you’re alive. After your death, what your beneficiary has to do to claim the money is show the bank a certified copy of your death certificate and proof of his identity.
If the account was a joint account, the bank will need to see the death certificates of all the original account owners. The bank records will show that your beneficiary is entitled to whatever money in your account. The bank doesn’t need anything from the probate court. Depending on the state, there may be a short waiting period before your beneficiary can collect the funds.
BENEFITS OF A PAYABLE ON DEATH ACCOUNT
The main benefit of the POD account is the ability to avoid probate.
Of course, you don’t want your beneficiaries to wait for a probate court to dispose of your assets; this can take five months or longer. There’s also the risk that your beneficiaries will be entangled in a legal battle in probate court.
POD accounts can also eliminate probate fees. If the inheritance money isn’t spent on probate fees such as court and attorney fees, that money will be available to go directly to the beneficiaries.
Another significant benefit of the POD account is that the owner of the account can increase his coverage limit under the FDIC or Federal Deposit Insurance Corporation. The standard coverage limit of a person’s assets at a particular bank, including checking and savings accounts, certificates of deposit and money market accounts is $250,000 coverage on up to five accounts at a single bank where the owner has a differently named beneficiary.
Each beneficiary cannot be covered for more than $250,000. Instead of saving money worth $1,250,000 in one account which will only be insured up to $250,000, having multiple POD accounts can increase an account owner’s coverage by up to five times the standard limit.
PAYABLE ON DEATH ACCOUNT PROS AND CONS
PAYABLE ON DEATH ACCOUNT PROS
POD account allows you to name a beneficiary on your bank account. When you pass away, your beneficiary has a right to the funds, and in most states, the account won’t be subject to probate proceedings. It’s an easy way to transfer your assets after you pass, but there are pros and cons to these types of accounts that you should be aware of.
The POD is very easy to create
Setting up a payable on death account is usually very simple. Typically, you will need to accomplish a form and sign it to choose your beneficiary or beneficiaries. You can also change your beneficiaries whenever you like and you can name several beneficiaries, this allows them to split the money when you’re gone.
Generally, all you have to do is inform the bank that you’d like to make your bank account payable to a particular person upon your death. It’s usually free to do this. Your POD account will avoid the cost of probate.
It’s easy for your beneficiaries to claim the money after you die
Your beneficiary can claim the funds in a fairly straightforward process. After your death, your beneficiary will only need to show proof of identity and provide a certified copy of the death certificate and complete some forms.
There are no monetary limitations
There are usually no limits on the amount of funds that you can transfer through a payable on death account. You are not limited on how much money you can leave this way.
Designating a beneficiary for a bank account is free
You can assign multiple beneficiaries while you are alive. You can name as many beneficiaries on your POD account as you would like. The proceeds may be divided equally between all beneficiaries or you can divide it in any manner you prefer. You can also change the beneficiaries of your POD account at any time.
You can cancel your POD account at will
You can cancel your POD account anytime you choose without any legal hassle. There are no limitations to a POD account, you can spend all the money prior to your death, change your beneficiary, or cancel the account completely.
Your beneficiaries only have the rights to the account after you die
Your beneficiary is not entitled to any of your money in the account while you are still alive. Upon your death, your beneficiary automatically becomes the owner of the account.
PAYABLE ON DEATH ACCOUNT CONS
These advantages may appeal to you because they can save you time, money and hassle. Before you open an account, you should consider the disadvantages as well.
Your account will revert to probate court if your beneficiary predeceased you
If your beneficiary passes away before you, your funds will be distributed to your estate through probate proceedings. That’s why it is advisable to name more than one beneficiary for your POD account. Your account will only go through probate in the event that all of your named beneficiaries died before you.
Your beneficiaries cannot access your account if you become incapacitated
If you become legally incapacitated because of accident or injury and you are unable to make decisions, your beneficiaries cannot access our account if you needed medical care. There is no provision in the POD to access your account if you become incapacitated. Additionally, if you wish to give your beneficiary access to the funds prior to your death, you will need to make the request to close your account which can cause time delays
POD gives no rights for the beneficiary while you are still alive
Your beneficiary cannot claim the money in your account while you are still living. They can only claim the funds upon your death. This can cause a delay should you change your mind because your beneficiary needs the money immediately.
POD offers no legal protection of the funds
Should your beneficiary find himself in the midst of divorce or bankruptcy, they run the risk of losing their inheritance through a POD. A payable on death account offers no legal protection on the funds – only a straight transfer. This can create problems if the timing is wrong – and you cannot control that.
States can free the POD account until estate taxes are paid
If you die with unpaid debts and estate taxes, your POD account may be subject to claims by creditors and the government. If there is no cash in the estate to pay estate taxes, the executor can go after those who received the POD and ask for money to pay estate bills.
There are ways to recover funds from POD designation, but without the cooperation of the beneficiaries, it will be an expensive legal process.
Designating one child as a beneficiary can cause family disharmony
Family disharmony can arise if only one child is designated as the POD beneficiary. On the account owner’s death, that same child will get the entire balance on the account, often to the surprise of his siblings.
Sometimes siblings are not willing to rearrange estate distributions to transfer the funds due to the POD creating disharmony at a difficult time.
SOME ISSUES ENCOUNTERED WITH PAYABLE ON DEATH ACCOUNTS
More often a POD account creates more problems than it solves.
The risk in a remarriage situation.
The husband and wife have a joint account. The account is structured as a Payable On Death to occur after both the husband the wife die. Let’s assume that the POD beneficiaries are their two respective children from their prior marriages. The husband dies first. There is a risk that the wife changes the POD beneficiaries to her only two children thereby disinheriting her deceased husband’s biological children.
More risks in a remarriage situation.
Now the wife remarries a third husband. She decided to change the POD beneficiary to her new husband. Now she succeeded in disinheriting her deceased second husband’s children and her own.
There are a lot of things that may go wrong in a remarriage situation either intentionally or by not understanding how POD accounts really work.
Rights of Creditors and Your Spouse
Avoiding probate through a POD account doesn’t mean avoiding your legal obligation. You can’t shortage creditors with a POD account.
If you don’t leave enough funds to pay your debts and taxes or to support your minor children and your spouse temporarily, a POD account may be subject to the claims of your family or creditors.
Your spouse also has rights. If you live in community property, spouse or registered domestic partner is considered the legal owner on the half-interest in your account, although the account is in your name only. If you contributed money you earned while you’re married, that money and the interest earned on it is considered community property, and your spouse or partner owns half of it.
If the money in your POD account is community property, and you decide to name other people other than your spouse as the POD beneficiary for the account, it’s better to get your spouse’s written consent first. Otherwise, your spouse could raise a claim to half of the money in the account at your demise, leaving the beneficiary you designated with only half.
POD account and minor beneficiary
If the beneficiary on the POD account is under the age of 18 who is a minor, court proceedings will be needed to appoint someone to manage the funds on the minor’s behalf.
WHAT OTHER OPTIONS DO I HAVE OTHER THAN A POD ACCOUNT?
If a POD bank account seems unsuitable for your needs, you have other options for transferring your account money.
You can transfer the money to a beneficiary through a will, which is actually the standard way for inheritances issues. It is also possible to create a revocable living trust, which is very similar to a POD account.
Like a payable on death account, both a will and a trust can help you avoid having your money go through probate. Also, wills and trust allow the beneficiary more flexibility than POD accounts. On the other hand, there can be a more complex requirement in order for a will or trust to be valid.
A POD is simpler to create that a will or trust. However, Trusts provide all the benefits and peace of mind of a payable on death account without much of a downside. Setting up a revocable living trust to hold your assets can provide long-term asset protection for your designated beneficiaries against bankruptcy, judgment lawsuit, and divorce courts.
Like a POD account, a funded trust avoids probate costs and delays, and your personal info is kept private. A trust can incorporate alternate beneficiaries and trustees should your beneficiary die ahead of you, or should you become incapacitated to administer your own affairs.
You should work with an estate-planning lawyer to weigh the payable on death account pros and cons in light of your other options for estate planning and avoiding probate.
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