Payable Upon Death Accounts
By Jackie Jacobs
For most people, the acronym POD means “Proof of Delivery” or “Payable on Demand.” But in estate planning terminology, POD has another meaning: Payable on Death.
POD bank accounts are commonly checking, savings, or CD accounts. They are sometimes called Totten trusts, tentative trusts, informal trusts, or revocable bank account trusts. Some folks even refer to them as a “poor man’s trust” because they are so simple and inexpensive to establish.
What all POD accounts have in common is that they are a safe and time-tested way to transfer money to individuals and organizations without the involvement of probate court. All that’s required is to notify your bank of who should inherit your certificate of deposit or the money in your account. The bank and the beneficiary you name will do the rest, bypassing probate court entirely.
The beneficiary does not have to be a person. Under Ohio law, any entity or organization can be named as a beneficiary of a POD account, including charities, according to the Ohio State Bar Association.
The person you name has no rights to the money until you die. If you need the money or just change your mind about leaving it to the beneficiary you named, you can spend the money, name a different beneficiary, or close the account.
When you die, the beneficiary simply needs to show the financial institution your death certificate and his or her identification, and the money is theirs. This works for bank accounts, certificates of deposit and even brokerage accounts. Customers of Charles Schwab, for example, need to fill out a “Designated Beneficiary Plan Application” to establish their POD account.
The legality of POD accounts goes back to a 1904 case decided by the New York Court of Appeals (the Matter of Totten, 179 N.Y. 112 ). Although this method of creating a trust did not meet the formal requirements of trust creation, or the testamentary formalities required to make a valid will, the Court noted that such an arrangement typically involves a small amount of money left by a person of modest means, who could not otherwise afford to establish a legal mechanism for passing the specified property. Hence the alternate nomenclature for PODs and Totten trusts: a “poor man’s will”.
Remember that a Totten trust is actually a trust in name only. As explained in the EstatePlanners.com website, it is an informal trust arrangement that is accomplished simply by titling an asset or bank account in the fashion of “Ricky Ricardo in trust for Lucy Ricardo”. In this way, Ricky would be in complete control of the account or asset and have total access during his lifetime. But when he passes away, the property would automatically pass to Lucy without the hassle and red tape of probate court, giving Lucy immediate access. Since it is not a trust, there is no trustee.
Here’s an example of how a Payable on Death designation on a modest checking account might be particularly convenient for an executor or personal representative. He or she could have ready access to pay for funeral expenses or other immediate cash needs during the estate administration period.
As with any financial product, there are potential pitfalls to consider. Since POD accounts are outside the probate process, they cannot be utilized as part of the estate plan created under the account owner’s will. So without proper coordination between the estate plan and POD designations, the estate may be subjected to substantial estate taxes.
Another issue to consider: If almost all of your assets are payable on death and you have debts, taxes and expenses in the estate, it’s difficult for the executor to pay these off. In those cases the executor would have to go through a proceeding with the clerk’s office to bring some or all of the POD assets back into the estate.
While POD account designations avoid probate and up-front legal expenses, it’s always wise to seek legal or financial counsel. If you need assistance with a Payable on Death account, it’s to your advantage to hire an experienced estate lawyer. Your attorney can advise you on your estate planning options and alternatives, including wills and trusts. In the event of a dispute over your assets, your lawyer can help defend your interests in court during a lawsuit.
Jackie Jacobs is the Chief Executive Officer of the Columbus Jewish Foundation, the Central Ohio Jewish community’s planned giving and endowment headquarters.
Article appears as originally published in the Ohio Jewish Chronicle, November 13, 2014.