What is a payable on death (POD) or transferable on death (TOD) account?

How to set up a payable on death account or transferable on death account

• Money in a POD goes directly to a named beneficiary after the account holder passes away.

• Investment assets like stocks and bonds can be directly passed on via a TOD.

• POD and TOD accounts allow funds to avoid probate.

• Sometimes, POD assets have to be reclaimed by the estate to pay for final expenses.

• If conflict arises between a POD and a will, the POD almost always prevails.

If you are the executor of an estate that includes accounts marked payable on death, or if you yourself are the beneficiary of such an account, it’s important to understand what this designation means. These accounts are often a key piece of your loved one’s plan for their estate, and knowing how they work will help you fully honor their wishes.

What is a payable on death account, and how is it set up?

Any client who has an account with a financial institution can contact it at any time to request that one or more of their accounts be designated as payable on death, or POD. It’s a matter of filling out the paperwork and listing who should get the money when they pass away. Once this paperwork is filed, all of the money in the account will be directly transferred to the designated beneficiary as soon as the account holder dies. Any bank account with a named beneficiary is considered a POD account. This type of account is also called a Totten trust.

There are no required minimums or maximums for POD accounts. During their lifetime, the account holder can spend some or all of the money, change the beneficiary to someone else, or close the account altogether. In order to claim the assets after the person dies, the beneficiary must contact the bank and present required paperwork, including the death certificate. Then they can either withdraw the funds or open a new account in their own name and transfer the money in, just as if they were starting any other kind of bank account.

What is a TOD account and how is it different?

Transferable-on-death accounts are essentially the same, but they specifically refer to accounts containing investment assets like stocks and bonds rather than cash. Just like with a POD, the beneficiary can set up a new investment account, and once they provide the necessary personal information, the securities are transferred into it. (Some states allow property deeds or other titles to be designated transferable on death as well.)

Why would someone choose a POD or TOD account?

The biggest benefit to a POD or TOD arrangement is that the assets in these accounts avoid probate. When money is left to a beneficiary through one of these accounts, the transaction happens irrespective of the will, and so bypasses the probate process. This means if you are the executor or court-appointed administrator of an estate, POD accounts are technically not your responsibility.

That said, the executor is typically the one to let POD beneficiaries know they have money coming to them. Unless the person told them beforehand, beneficiaries might have no idea they are entitled to any assets. Additionally, if the beneficiary isn’t sure how to claim their inheritance, they will usually ask the executor for help; assisting them can be as easy as giving them the name of a contact at the bank.

Identifying which accounts are designated POD is typically simple, as they often have “POD” in the account name. Sometimes the beneficiary’s name is included as well, so the full name on the account would be something like “Jane Doe Savings Account POD for John Doe, Jr.” If there’s any question as to what money is going to whom, the bank will tell the executor directly in their capacity as the representative of the estate.

How to set up a payable on death account

Just because the executor is typically not responsible for POD accounts, this doesn’t mean that they can ignore them entirely. The executor has no control over a POD account because it never becomes part of the probate estate, but this lack of control can become an issue. If a person dies with all or most of their money in POD accounts, it’s hard for the executor to access the funds they need to cover any debts, taxes, and expenses that fall to the estate.

If the estate cannot cover its debts because the beneficiaries received the money outside of probate, the executor may have to go through a proceeding with the clerk’s office to attempt to bring assets back into the estate. Generally, the executor will have to contact the probate court overseeing the estate’s case to explain the situation. Depending on local laws and precedent, the probate court judge will make a ruling to determine how exactly the debts will be paid off. According to that ruling, the beneficiaries might be required to release the money they inherited from the POD account or accounts to the estate in order to pay creditors.

Do you pay taxes on POD accounts?

In addition, PODs and TODs are usually considered part of a person's taxable estate for the purpose of federal and state estate taxes. Therefore, if your loved one's estate including these and other taxable non-probate assets is valued in the millions of dollars (the federal estate tax threshold in 2021 is $11.7 million), the funds in a POD account may be required by the courts to be used to pay the estate's tax debt.

It’s worth noting that there is often no option to name secondary or tertiary beneficiaries on a POD account. Unlike stipulations common in a will or a life insurance policy, this means that you can’t set up contingencies ensuring that POD assets go to person one, but if they die first they automatically go to person two, and so on.

POD accounts with multiple beneficiaries

Therefore if the named beneficiary passes away before the primary account holder, the contents of the account become part of the estate instead, and go through probate, despite its POD status. To avoid this problem, some people choose to name multiple primary beneficiaries simultaneously for each account. The account owner can designate how the multiple beneficiaries should split the assets.

Because establishing POD status on an account is so simple, it’s common for account holders to be pretty informal about it. For example, someone might name a single beneficiary, perhaps an oldest child, as the sole beneficiary on an account, assuming that after they die, that child will go on to equally distribute the funds between themselves and their other siblings. However, if there are no explicit instructions that this was their intention, the named beneficiary has no legal obligation to share with the others. There have also been occasions, especially involving elderly grandparents with big families, where grandchildren or other descendants are mistakenly left out altogether.

Divorce can be another obstacle. If a spouse is named as a POD beneficiary but then the couple divorces, the POD may or may not be automatically canceled. This varies from state to state, so if you find yourself dealing with this situation, it is important to consult a lawyer or look up the rules in your area.

In some very rare instances, local laws restrict who can be named as a POD beneficiary. Any individual can be a recipient, but sometimes charities and organizations cannot.

Finally, sometimes provisions in the will and POD designations contradict one another. Almost always, the POD designation takes precedence; it is an agreement the account holder made with the bank directly, and unless it’s a very special case, the will can’t change that.

Any areas of assumption or confusion in this arena can inevitably lead to misunderstandings and hurt feelings. If you find yourself trying to manage one of these complex situations, it is to everyone’s benefit to proceed with extra care, keep lines of communication open, and make your intentions clear.

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