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Money in life insurance and retirement accounts typically transfers directly to designated beneficiaries when the account owners die, thus avoiding probate. A payable on death (POD) designation ensures a regular bank account also can automatically transfer to a beneficiary without going through probate.
What is a payable on death (POD) account?
Payable on death is an arrangement between a financial institution and a client under which the client designates specific beneficiaries to receive the account’s assets when the client dies. Because of this direct transfer, POD-designated accounts bypass probate, the legal process for distributing property after someone dies.
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Here are some key things to remember about POD accounts:
The beneficiary doesn't have access to the assets in a POD account while the owner is alive. To claim the assets in the account, they’ll need to show proof of identity and a certified copy of the account owner’s death certificate.
If the account holder lives in a community property state, their spouse typically has a legal claim to half of the assets in the account unless the assets were inherited or acquired before marriage.
Because a POD account is revocable, the owner can close the account, withdraw all of the money in it or change the beneficiary at any time.
If the account is jointly owned, the beneficiary cannot access the assets in the account until both owners have died. The beneficiaries named by the second surviving owner will inherit the account.
POD accounts are also sometimes called transfer on death (TOD) accounts, Totten trusts or informal revocable bank account trusts. However, TOD accounts are generally for securities and investment assets, while POD accounts are standard bank accounts. Some states allow TOD deeds for real estate or vehicles.
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Pros and cons of a POD account
The account goes directly to your designated beneficiary without going through probate, which can be costly and time-consuming.
You can’t name alternate or backup beneficiaries to a POD account, meaning the account will remain part of your estate if the beneficiary dies before you.
POD-designated accounts qualify for higher Federal Deposit Insurance Corp. insurance: up to $1,250,000 on up to five accounts with different beneficiaries versus the standard $250,000 coverage limit.
Typically, you can name multiple beneficiaries who will split the assets, but they’ll likely split them evenly; only some states allow an unequal distribution of assets in a POD account.
POD accounts override a last will and testament. The named beneficiary on a POD account will receive the assets no matter whom they’re designated to in the will.
POD accounts can make debt, taxes and loans complicated upon the owner’s death, especially if there are multiple beneficiaries. If there are unpaid taxes or debts, the account may be subject to claims by creditors.
How to set up a POD account
You usually can add a POD designation to any personal checking account, savings account, certificate of deposit (CD), individual retirement account (IRA) or investment account. These are the steps to take:
Request payable on death paperwork from the bank or credit union where you keep the account. This form may be called a Totten trust, and you may have to go to a branch in person.
Choose your beneficiary, and fill out their information on the form. You may need to supply the beneficiary’s full legal name, Social Security number, address and birthdate.
Return the completed forms and supporting documentation to the financial institution.