Payable on death accounts, or “POD accounts” for short, have become popular for avoiding probate in the last decade or so. These accounts include life insurance policies, certain retirement accounts, and cash accounts with designated beneficiaries. While the idea of these accounts is to avoid probate and simplify distributions, POD accounts can have unintended negative results, which are contrary to the account owner’s wishes.
What is a POD Account?
A POD account is a type of bank account authorized by state law which allows the account owner to designate one or more beneficiaries to receive the funds left in the account when the owner dies.
A POD account allows the owner to do what he or she pleases with the funds held in the account during the owner’s lifetime, including spending it all and changing the beneficiaries of the account. After the owner dies, if anything is left in the POD account, the beneficiaries chosen by the owner will be able to withdraw the remaining funds without the need for probating the account by presenting an original death certificate of the owner.
What Can Go Wrong With a POD Account?
POD accounts sound great, don’t they? In general, POD accounts are easy to set up and make sense for many people. A handful of states now even recognize POD deeds for real estate and POD designations for automobiles.
Nonetheless, POD accounts may lead those who create them to believe that they have an “estate plan” and no additional steps will need to be taken. This may or may not be true. Below are a few examples of what can, and often does, go wrong with POD accounts:
POD accounts such as life insurance policies provide death proceeds to the designated beneficiaries. These proceeds are automatically transferred to the named parties by operation of law at the passing of the account owner. Many times, the owner’s intention is to provide liquidity for the settlement of the estate and final expenses. However, if there are three named beneficiaries, each person receives a check for their portion of the proceeds. At this point, each person can do whatever he or she likes with the proceeds. If someone chooses not to contribute a portion of the funds for estate settlement purposes, they have no obligation to do so. In such a situation, using a more advanced estate planning tool, such as an irrevocable life insurance trust may be the proper solution.
POD accounts can be set up as joint accounts that become payable on death after all of the owners die. This means that if a husband and wife in a second marriage set up a POD account that will go to their six children from their first marriages after both die and the husband dies first, then the wife can simply change the POD beneficiaries to her own three children and disinherit the husband’s three children.
What about a situation with the same facts as above, except that the spouse remarries for a third time? He or she could change the beneficiary of the POD account to her new husband, thereby disinheriting her children and her deceased husband’s children.
If there is only one POD account owner and he or she becomes mentally incapacitated, then a valid power of attorney or court-supervised guardianship or conservatorship might be needed to access the POD account to help pay for care for a sick loved one.
If a POD beneficiary is a minor under the age of 18 or 21 (this depends on state law), then a court-supervised guardianship or conservatorship may need to be established to manage the minor’s inheritance.
If all of the named POD beneficiaries predecease the account owner, then the account may have to be probated.
These are just a few examples of why POD accounts should not be a primary asset transfer mechanism in your estate plan. You need to have a will, a revocable living trust, a power of attorney, and a health care directive in place to insure that you and your property are protected in case you become mentally incapacitated and to make sure that your property goes where you want it to go after you die.
If you want to ensure that your family is cared for, please click here to schedule your complimentary Estate Planning Strategy Call with San Francisco’s premier estate planning attorney, Matthew J. Tuller.