Payable-on-death accounts are a type of bank account that, at the owner's death, lets the money remaining to pass directly to the beneficiaries named by the account owner. They offer an easy way to keep money out of probate. What's needed? Just properly notify your bank how you want to leave the money in the account — checking, savings, money market or certificate of deposit account. Even U.S. savings bonds can become a POD account. The bank and
the beneficiary you name will do the rest. This bypasses probate.
As long as you're living, your beneficiary has no rights to your money. If you need money or change your mind about the beneficiary, you can spend, spend, spend; you can also name a different beneficiary or simply close the account. At your death, the POD account will pass to the beneficiaries named even if you have a last will and testament or a revocable living trust — regardless of what the will or trust says.
So what's the downside? You can't name an alternate beneficiary. But the positive aspects?
- They're easy to create.
- There's no limit on how much money you can leave.
- Designating a beneficiary costs nothing.
- It's easy for the beneficiary to claim the money after you're gone.
You should know that a payable-on-death account goes by different names. Some call it a Totten trust. Some call it a tentative trust or revocable bank account trust. It may also be referred to as an ITF account, which stands for "in trust for."
Avoiding probate doesn't mean you can slip by creditors or your family — you can't use the account to avoid your legal obligations. If you don't leave enough assets to pay your debts and taxes or to support your spouse or minor children temporarily, the account or any asset that passes outside probate may be subject to the claims of creditors or your family.
After all, your spouse has rights, especially if you live in a community property state — your spouse or registered domestic partner could already be the legal owner of half your account.
So, assuming the money in your payable-on-death account is community property, and you're looking to name someone other than your spouse as the beneficiary for the whole account, you should get your spouse's consent. Otherwise, your spouse can assert a claim on your death to half the money.
In noncommunity property states, a surviving spouse who isn't happy with what she or he is inheriting may be able to claim part of the money you left to someone else. It's rare, though, that spouses go to court to claim these assets.
After you're history, the beneficiary claims the money by showing the bank a certified copy of the death certificate and proof of his or her identity. The bank's records will make it clear that the beneficiary is entitled to the money in the account. There is no need for anything from a probate court. State law will dictate how long to wait before the funds are released.
Is a POD right for you? Or would a trust be a better way to manage your estate plan? Let us help you figure out the right tools for your situation.