PODs and TODs: The Double-Edged Sword
A Payable-on-Death account, known as a POD, is a type of bank account designation. Payable-on-Death beneficiary designations can be set up on checking accounts, savings accounts, money market accounts, CDs, and savings bonds. A POD allows you to designate who the money in those accounts will go to upon your death. Like other beneficiary-designated accounts (i.e. life insurance, 401k, IRA), this transfer will happen outside of the probate process and an estate may not need to be opened when you die. A Transfer-on-Death Plan, known as a TOD, is similar to a POD except it relates to securities, i.e. stocks and bonds. While seemingly a quick, easy and no-cost way to distribute assets to named beneficiaries, there are certain pitfalls to avoid.
Many people have the bulk of their assets in accounts that would be eligible for a POD or TOD designation. However, one major issue with POD and TOD titled assets is a lack of coordination with respect to an overall estate planning strategy. Oftentimes, people do not understand that POD and TOD beneficiary designations override whatever is stated in your Will. Said another way, your Will does not control how POD and TOD assets are to be distributed.
Additionally, thought should be considered if POD/TOD assets are to go to minors. If a minor receives such assets, a court-overseen conservatorship would likely need to be established for that beneficiary. Conservatorships can be burdensome and expensive to administer. Trusts are often better vehicles to manage and administer assets held for minors as trusts tend to be less hassle, less expensive and more flexible.
Another murky issue with POD/TOD accounts is if estate or inheritance taxes are owed at the death of the owner of those POD/TOD assets. Estate and/or inheritance taxes could potentially be due from people these assets are to be distributed, depending on, among other things, how your will is drafted. If there are potential tax issues, a more involved estate plan may be needed.
The above are only some of the areas of concern that should be considered prior to implementing POD/TODs on your accounts. If implemented without thought, it can cause unforeseen consequences, and, ultimately a higher or lower percentage of your assets may go to beneficiaries than you intended. It is advisable to speak to a qualified attorney and/or reputable financial advisor to ensure your POD/TOD designations are coordinated with your overall estate plan.