What happens to the money in your bank account, your stocks, bonds, and other investments when you die? Whether it's a savings account, brokerage account, or something else, you might be able to make the account payable on death (POD) or transferable on death (TOD) to a beneficiary of your choosing.
POD and TOD accounts require valid beneficiary designations
Pay or transfer on death accounts are not subject to probate
These accounts will pay out or transfer directly to the beneficiary
What is a payable-on-death-account?
Payable-on-death accounts, or transfer-on-death accounts, refer to any financial account with a designated beneficiary. The named beneficiary will receive these assets once the account holder dies. You might also hear a POD account referred to as a bank account trust, Totten trust account, or even casually as a "poor man's trust." (A POD bank account is recognized by the FDIC as an informal revocable trust.)
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Many people have accounts that can be set up as payable on death, but they may not know it. Examples of payable-on-death (POD) accounts are:
Certificates of deposit (CDs)
Money market accounts
Life insurance also functions like a payable-on-death account, since the death benefit gets paid to your beneficiaries after you die.
The difference between POD and TOD accounts
Some accounts technically transfer ownership — rather than pay out the funds — to a designated beneficiary upon the account holder’s death. These accounts are called transfer-on-death (TOD) accounts and some examples include:
Retirement accounts, like traditional and Roth IRAs
How to set up a payable-on-death account
Bank accounts are not automatically payable or transferable on death. To make the money in an account payable on death, you need to create a beneficiary designation. The financial institution (bank, credit union, retirement plan provider, or broker) who holds the money or assets may let you assign a POD or TOD beneficiary online through their website, but if not you’ll have to physically fill out and sign a paper form and return it to them.
You can name multiple beneficiaries, and even a backup beneficiary, to your POD account and are usually allowed to change them, too. (Remember to periodically check and update who your beneficiaries are, especially if you experience a big life event like getting divorced or having a child.)
After setting you a POD account you should take care not to include it in your will since it’s handled separate to avoid confusion after you die.
If you don’t make your bank accounts payable on death, the assets become part of the estate, and if someone dies intestate the court will determine who inherits.
Claiming a POD account
You don’t need an executor to claim a payable-on-death account. If you’re the named beneficiary of a POD bank account, you can claim it by providing a certified copy of the death certificate to the bank.
If it is a joint account, meaning there is more than one owner, then a POD beneficiary cannot claim the money until all of the account owners have died.
Payable-on-death accounts and taxes
Beneficiaries of a payable-on-death account may have to pay inheritance tax if it is levied in their state.
Payable-on-death accounts are included when calculating the value of a deceased person’s estate, which means that POD and TOD accounts can add to the gross estate and trigger estate taxes if you die with holdings over the exemption limit — $11.7 million in 2021 (increasing to $12.06 million in 2022).
Pros and cons of payable-on-death accounts
Payable-on-death accounts are a convenient part of an estate plan because they can be passed along to your loved ones with relative ease. By contrast, using a will to leave an inheritance for someone can take time while your affairs and estate are being settled, which can be further delayed if there are disputes among your heirs and someone contests a will.
While POD accounts can be useful, they have some disadvantages and shouldn’t be your sole method of distributing assets to your loved ones. For one thing, a POD account can’t restrict a beneficiary's use of the funds or account holdings. If you are worried about how someone will spend their inheritance, you might consider opening a trust, a separate entity with its own set of rules that can govern how the money is used.
Additionally, a POD or TOD account is only effective if the account holder dies; it would not transfer or pay out any money to someone if you end up in a coma. If you want someone to be able to access your finances for any reason, you'll need to grant them financial power of attorney.
A strong estate plan incorporates POD accounts and a will.
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