Probate is the court-supervised process that oversees distributing a deceased person’s property. Most people want to avoid their estate going through probate because their heirs will receive the inheritance faster, privately, and at lower cost. A payable-on-death or transfer-on-death account, also called a POD or TOD account, is a common way to keep bank and investment accounts out of probate. Is a POD/TOD account an appropriate solution for your needs? In this article, we’ll examine what POD/TOD accounts do and how they fit into the overall picture.
A POD designation can be set up for savings, checking, certificates of deposit, and U.S. savings bonds. A TOD designation is set up for an investment account. Upon the death of the account holder, the funds in a POD account pass directly to the named beneficiary, while the investments in a TOD account are immediately transferred to the named beneficiary.
Setting up a POD/TOD account is usually very easy. Typically, there’s a form you need to complete and sign to select your beneficiary or beneficiaries. Additionally, you can change beneficiaries whenever you like or name several beneficiaries (allowing them to split the money).
After the death of the POD/TOD account holder, the beneficiary can claim the money or assets in a fairly simple process. Often, the beneficiary will need to show ID, provide a copy of the death certificate, and complete some forms provided by the financial institution.
POD/TOD sounds great because they are easy, but there can be significant problems in using this as the primary tool for passing along what you’ve worked to build. What if a beneficiary dies before you? If you do not name new ones before you die, then your estate is back to probate, thus negating the primary advantage of establishing the POD/TOD account in the first place.
What if the beneficiary is in the middle of a bankruptcy, divorce, or lawsuit? Because a POD/TOD account transfers the money/investments to the beneficiary without any protection, your beneficiary may lose his or her entire inheritance simply because the death of the POD/TOD account owner occurred at the “wrong” time.
What if you are in a car crash and rendered legally incapacitated and unable to make decisions? The named beneficiary cannot access funds to provide for your needs. POD/TOD accounts only function at death. They provide no protection in the event of your incapacitation.
Here’s a comprehensive solution: establish a revocable living trust to hold your accounts. Just like a POD/TOD account, a funded trust avoids probate and is private. But, unlike a POD/TOD account, it can incorporate alternate beneficiaries, so your assets avoid court even if someone predeceases you. You can also provide long-term asset protection for your beneficiaries, protecting them against lawsuits, judgments, divorce, and bankruptcy. If you become incapacitated due to an accident or illness, the successor trustee can use the assets in your trust to pay for your care. Trusts provide all the benefits and peace of mind of a POD/TOD account without any of the downsides.
Rather than choosing tools out of a hat, you first need clarity on the big picture. What are your goals and priorities? What challenges do you face now—or do you anticipate confronting? Whom do you want to protect? What kind of legacy do you hope to leave? Our team can organize your thinking and help you select appropriate planning tools from the arsenal. Want to discuss POD/TOD accounts, living trusts, or just your future in general? Please contact us at the Forrest Firm to get started.