Hugh F. Wynn
Grim Reaper: PODs Dispense Quick Cash Upon Your Untimely Passing
A payable on death account (POD) is a bank account frequently used for estate planning purposes. POD money is not part of the probate process so it allows beneficiaries quick access to to cash that can help them pay for - AHEM - memorial and/or funeral costs and other immediate expenses. Let's explore. Since I’m not a credentialed financial advisor, the answers (observations) I give are strictly my opinion.
A (POD) is basically an arrangement between you and a bank or credit union that designates all of your account assets to your beneficiaries. You can create a POD account or convert an existing account to a POD and there’s no limit to the amount of money or the number of accounts that can be passed to beneficiaries in this way. It's most useful purpose is to expedite and simplify the process of transferring certain assets (money) to beneficiaries upon the account owner’s untimely demise.
Technically, PODs are types of trusts, often called Totten, informal, or tentative trusts by banks. They’re easier – and less expensive – to set up than a traditional living trust, and they focus strictly on assets held in a bank account.
Your named beneficiary is not entitled to any of the money in the account while you (the account holder) are still alive. However, when you take leave of this Earth, your beneficiary automatically becomes the owner of your POD account, bypassing your estate and skipping probate completely.
What this means is that the executor of your estate has no control over POD account assets and the POD funds are not part of the probate process. So, in theory, estate debts should be paid from the estate as part of the probate process. The only way a POD account beneficiary would be contractually obligated to pay any bills is if that beneficiary is a guarantor of the deceased party’s debt (i.e., a co-signer on a credit card or auto loan). So, if you pass away with unpaid debts and taxes, your beneficiary's POD account may be subject to claims by creditors and the government.
POD account funds generally are not included in a beneficiary’s taxable income (bequests aren't taxable income), but they should be aware of the potential tax implications and other consequences of inheriting a POD account before spending the money.
Income earned prior to and between the date of death and the date the beneficiary takes possession of the account is reported on the estate's final tax return. After taking possession, earnings related to the POD account become taxable to the beneficiary. And a beneficiary will pay inheritance taxes at the state level if the POD owner held the account in one of the six states that have an inheritance tax - Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania.
Why use POD accounts to transfer assets? Here's a few good reasons:
Assets passed to beneficiaries through POD accounts are not subject to probate – a legal process involving a detailed inventory of assets, payment of debts, and distribution of residual assets to heirs. By definition, probate can be time-consuming, inefficient and expensive if not properly preplanned.
POD accounts ensure that beneficiaries have quick access to money after the owner’s death which can be used to pay for outstanding debts and/or to cover various funeral and burial expenses. Of note: The existence of a valid will and/or life insurance policies often do not provide ready cash to meet immediate financial needs of an estate.
Beneficiaries cannot access funds in a POD account while the account owner is alive. This feature eliminates the risk of a beneficiary exhausting the POD account’s assets without the owner’s knowledge.
A Few Caveats
A POD account could pose problems should the owner become incapacitated and funds are needed for medical care or other emergency purposes. Emergency fund assets held in a trust or in a jointly-owned bank account would help avoid this risk. Also, if other assets such as real estate, vehicles, investments or business assets need to be transferred, you might alternatively (or also) consider a living trust.
By the way, should the beneficiary pre-decease the POD owner and no other beneficiary is named, assets in the POD account become subject to the normal probate process, which obviates its intended “immediate access” purpose. In other words, you can't name alternate beneficiaries to your POD account.
How To Create a POD
Work with your bank representatives to create a POD account. They will advise whether it’s possible to add a beneficiary designation to an existing account or whether a new account must be created. Once your account is created, you need to designate beneficiaries. Be reasonably certain that the person(s) chosen will outlive you (the POD account owner) and will manage any assets received in a responsible manner.
A POD account owner should inform named beneficiaries that the account has been created, giving them the opportunity to familiarize themselves with how to claim assets in the account once the POD owner passes. Incidentally, it isn’t a problem naming more than one person as a beneficiary of a single account. In such instances, the beneficiaries, upon presentation of a death certificate and a personal ID, split the money evenly among themselves – or in proportions specified by the POD owner in the beneficiary designation form.
Finally, it’s important to compare the terms of the POD account with provisions specified in a will. In most cases a POD account can override a will, but a quick review could avoid potential conflicts among heirs after a POD owner’s passing. When the account owner (or last surviving owner of a joint account) passes, the beneficiary simply claims the money by presenting the aforementioned death certificate and personal ID to a bank representative.
Remember, the POD account is meant to allow its beneficiaries quick access to cash to pay for funeral services and the like. Select POD account beneficiaries carefully to ensure immediate payment of more pressing financial obligations. A properly executed POD account reduces the likelihood of a will - or a probate court - unnecessarily complicating the process.