What are payable-on-death accounts and why do they matter?

This important part of an estate plan avoids probate.

Elissa

Elissa Suh

Published July 25, 2019

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KEY TAKEAWAYS

  • 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 happens to the money in your bank account or investments in your brokerage account when you die? Whether it’s a savings account, brokerage account (for stocks and other investments), 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.

Payable-on-death accounts are an important part of estate planning, since they can avoid probate, or the lengthy process of proving a will and distributing assets to heirs.

In this article:

How a payable-on-death or transfer-on-death account works

Payable-on-death accounts, or transfer-on-death accounts, refers to any financial account with a designated beneficiary. The beneficiary will receive these assets once the account holder dies. The FDIC recognizes this arrangement as an informal revocable trust. You might also hear a POD account referred to as a bank account trust, Totten trust account, or perhaps casually as a “poor man’s trust.”

Many people have accounts that can be set up as pay- or transfer-on-death accounts without knowing it.

Examples of payable on death (POD) accounts:

Examples of transfer on death (TOD) accounts:

Accounts are not automatically payable or transferable on death. You will need to set up what happens upon your death by creating a valid beneficiary designation.

Setting up POD or TOD

To make the money or account pay or transfer on death, you typically need to fill out and sign a form outlining the details and naming your beneficiary. Ask your financial institution or retirement plan provider for more details and be sure to return the signed form to them.

You may also be able to assign a POD or TOD beneficiary online through your bank or brokerage’s website.

You are usually allowed to change your beneficiaries, 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.)

If you fail to designate a beneficiary for these financial accounts, they will pass through probate and the funds will be distributed to your heirs. (If you didn’t designate any heirs, then your estate is in intestacy).

Claiming the account

To claim the account, a named beneficiary must provide a certified copy of the death certificate. If it is a joint account, meaning there is more than one owner, then the POD beneficiary cannot claim the money until all of the account owners have died.

Payable-on-death accounts and taxes

Payable- and transfer-on-death accounts have tax implications for the deceased account holder. The gross value of someone’s estate is calculated upon their death. The taxable estate includes not only real estate property, but bank account holdings and investment assets as well. For this reason, POD and TOD accounts will be included in that value, which may result in an estate tax.

Beneficiaries of a payable on death account will be subject to the inheritance tax if it is levied in their state.

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Pros and cons of payable-on-death accounts

Estate planning is planning for what happens when you die. For many people this includes using a will or trust to pass along assets to heirs. Upon death, the process of probate begins. This can take time, and can be further delayed if there are disputes among heirs and someone contests a will.

Payable on death accounts are convenient because they can be passed along without being subject to the probate process. The money can usually be claimed as soon as the beneficiary furnishes a copy of the death certificate.

As part of estate planning, the importance and usefulness of POD accounts should not be discounted. However they should not be the basis of bequeathing an inheritance for loved ones. For one, the account owner cannot restrict the beneficiary’s use of funds or the account holdings. If you are worried about how an heir will use 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 effectual if the account holder dies; it would not transfer or pay out if the owner ends up in a coma. You’ll need to grant someone financial and legal powers with a power of attorney form.

Consult with an estate planning attorney to come up with the best plan to get your assets to your intended heirs.

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