What Is Payable on Death?
Payable on death (POD) refers to a designation made on a bank or credit union account that stipulates who will inherit the funds upon the account holder's passing. This mechanism is a component of Estate Planning, allowing for the direct transfer of assets to a named Beneficiary without the necessity of going through Probate court. The account holder retains full control over the funds during their lifetime, including the ability to withdraw money, change beneficiaries, or close the account. A payable on death designation ensures that the funds in specific Deposit Accounts, such as checking, savings, or certificates of deposit (CDs), are transferred efficiently to the intended recipient upon the owner's death.
History and Origin
The concept behind payable on death accounts has roots in the legal principle of the "Totten trust." This informal trust, which functions similarly to a payable on death account, originated from an early 20th-century New York court case, Matter of Totten (1904). The ruling established that a person could open a bank account "in trust for" another individual, with the understanding that the named individual would receive the funds upon the account owner's death. This arrangement allowed for the direct transfer of bank assets outside of formal probate proceedings. The ease and cost-effectiveness of this method led to its widespread adoption, with many states subsequently enacting specific statutes to formalize and govern payable on death designations for various financial instruments.6
Key Takeaways
- A payable on death (POD) designation allows for the direct transfer of funds in bank accounts to a named beneficiary upon the account owner's death, bypassing the probate process.
- The account holder retains complete control over the funds during their lifetime, with the ability to manage, spend, or change beneficiaries.
- POD accounts can offer quick access to funds for beneficiaries, as they do not typically require a lengthy legal process for distribution.
- Federal Deposit Insurance Corporation (FDIC) coverage for payable on death accounts can extend beyond the standard per-depositor limit, potentially covering up to $1.25 million for accounts with multiple beneficiaries.
- While convenient, payable on death accounts have limitations, particularly concerning coordination with other Estate Planning documents and potential claims from Creditors.
Formula and Calculation
A payable on death designation does not involve a specific financial formula or calculation for its implementation. Its primary function is to define the distribution pathway of assets upon an account holder's death rather than to calculate a monetary value. The amount received by a beneficiary is simply the balance of the account at the time of the account holder's death. However, when considering Financial Planning for multiple beneficiaries, the distribution is typically a straightforward division of the remaining funds. For example, if an account has a balance ( B ) and is designated to ( N ) equally named beneficiaries, each beneficiary would receive:
If specific percentages are designated, the distribution is calculated as:
The sum of all percentages for beneficiaries should equal 100%.
Interpreting the Payable on Death
Interpreting a payable on death (POD) designation centers on understanding its power as a non-probate transfer mechanism. When an account is established as payable on death, it means the funds in that account are explicitly earmarked for the named Beneficiary and will transfer directly to them outside the formal court process known as Probate. This avoids the delays, costs, and public nature often associated with court-supervised asset distribution.
Crucially, the payable on death designation overrides instructions left in a Will. If a will states that all assets should be divided equally among children, but a payable on death account names only one child, the funds in that specific account will go solely to the named child, regardless of the will's general instructions. This emphasizes the importance of coordinating all Estate Planning documents to ensure that an individual's wishes for asset distribution are consistently met across all holdings. The designation is effective immediately upon the account owner's death, allowing for relatively swift access to funds by the beneficiary after presenting a death certificate to the Financial Institution.
Hypothetical Example
Sarah, a single parent, wants to ensure her daughter, Emily, receives her savings quickly and without complications if something happens to her. Sarah has a savings account with $75,000. To achieve her goal, she visits her bank, a Financial Institution, and requests to add a payable on death designation to her account.
The bank provides Sarah with a form, which she completes, naming Emily as the sole Beneficiary for the account. Sarah continues to manage and use the savings account as she always has. If Sarah were to pass away, Emily would present Sarah's death certificate and her own identification to the bank. The bank, recognizing the payable on death designation, would then transfer the $75,000 directly to Emily, bypassing the potentially lengthy Probate process that might otherwise tie up the funds.
Practical Applications
Payable on death designations are widely used in personal Financial Planning for several reasons:
- Probate Avoidance: The primary application is to circumvent the probate process for the designated Deposit Accounts. This can save time and money for beneficiaries, allowing them quicker access to funds that might be needed for immediate expenses.
- Ease of Establishment: Setting up a payable on death designation is typically straightforward, often requiring only a simple form from the Financial Institution.
- Privacy: Unlike assets that go through probate, which becomes a public record, the transfer of funds via a payable on death designation is private.
- Increased FDIC Coverage: For bank accounts, payable on death designations can increase Federal Deposit Insurance Corporation (FDIC) coverage beyond the standard $250,000 per depositor. An account owner can have up to $250,000 in coverage for each unique Beneficiary named, up to a maximum of $1,250,000 for five or more beneficiaries at a single insured bank.5
Limitations and Criticisms
Despite their advantages, payable on death (POD) accounts have certain limitations that can impact Estate Planning effectiveness. One significant drawback is the potential for conflict with a Will. Since payable on death designations override a will, if the designations are not carefully coordinated with other estate documents, they can lead to unintended distributions, potentially disinheriting certain Legal Heirs or causing an unequal division of assets not aligned with the account holder's overall wishes.4
Another limitation is that payable on death accounts generally do not allow for the naming of alternate or contingent beneficiaries. If the primary Beneficiary predeceases the account owner, the funds in the payable on death account may then revert to the owner's estate and become subject to Probate, negating one of the primary benefits of the designation. Furthermore, while payable on death accounts bypass probate, they do not automatically protect assets from Creditors of the deceased's estate. If the estate lacks sufficient funds to cover debts, taxes, or funeral expenses, a payable on death account's funds may still be claimed.2, 3
Additionally, payable on death accounts offer no control over how the funds are used by the beneficiary once received. Unlike a Trust, which can impose conditions on distributions, a payable on death transfer is a direct lump sum, which may not be ideal for beneficiaries who are minors or who may not manage large sums responsibly.1
Payable on Death vs. Transfer on Death
Payable on death (POD) and Transfer on Death (TOD) are similar non-probate transfer mechanisms, often used interchangeably in discussion due to their shared goal of bypassing Probate. However, they typically apply to different types of assets.
| Feature | Payable on Death (POD) | Transfer on Death (TOD) |
|---|---|---|
| Asset Type | Primarily Deposit Accounts like checking, savings, CDs. | Securities, such as stocks, bonds, mutual funds, and sometimes real estate (through a TOD deed). |
| Legal Basis | Established at banks/credit unions, often under state banking laws. | Typically covered by state statutes like the Uniform Probate Code or Uniform TOD Security Registration Act. |
| Control by Owner | Full control during lifetime. | Full control during lifetime. |
| Probate Avoidance | Yes, for the designated account. | Yes, for the designated security or property. |
| Beneficiary Rights | No rights until owner's death. | No rights until owner's death. |
The key distinction lies in the type of asset each designation covers. A payable on death typically refers to bank accounts, while a Transfer on Death refers to investment accounts and, in some states, real property. Both aim to simplify the transfer of assets to a named Beneficiary upon the owner's passing, avoiding the delays and expenses associated with the probate court process.
FAQs
Can I name multiple beneficiaries on a payable on death account?
Yes, you can typically name multiple beneficiaries on a payable on death account. Most financial institutions allow you to designate more than one Beneficiary, and you can usually specify how the funds should be divided among them, such as equally or by percentage. If no specific percentages are given, the funds are usually divided equally.
What happens if the named beneficiary dies before the account owner?
If the primary Beneficiary of a payable on death account dies before the account owner, the outcome depends on whether a contingent beneficiary was named or if the financial institution's rules address such a scenario. In many cases, if no alternate beneficiary is designated, the funds in the payable on death account may revert to the account owner's estate upon their death, meaning they would then pass through Probate and be distributed according to the owner's Will or state Intestacy laws.
Are payable on death accounts subject to estate taxes?
While payable on death accounts generally avoid Probate, the funds held within them are still considered part of the deceased's taxable estate for federal estate tax purposes, if the estate meets the federal estate tax threshold. However, the Beneficiary typically does not pay income tax on the inherited funds. State inheritance or estate taxes may apply depending on the state's laws and the relationship between the deceased and the beneficiary.
Can Creditors claim funds from a payable on death account?
Yes, even though payable on death accounts bypass Probate, the funds may still be subject to claims from the deceased's Creditors, especially if the rest of the estate is insufficient to cover outstanding debts. Laws regarding creditor access to payable on death funds vary by state. The Executor of the estate may need to recover funds from a payable on death account if necessary to satisfy legitimate debts and taxes.
How do I set up a payable on death account?
To set up a payable on death account, you typically need to visit your Financial Institution (bank or credit union) and request a payable on death (POD) or Beneficiary designation form. You will need to provide the full legal name, Social Security number, and address of each beneficiary you wish to name. Some institutions may also allow you to complete this process online.