Posted On: OCTOBER 2024
Payable-on-death (POD) and transfer-on-death (TOD) accounts can be simple, inexpensive tools for leaving assets to your heirs outside of probate. But in some cases they can lead to unintended — and undesirable — results.
Generally, POD is used for bank accounts while TOD is used for stocks and other securities. But they work basically the same way. You complete a form provided by your bank or brokerage house naming a beneficiary and the assets are automatically transferred to the beneficiary when you die.
Despite their simplicity and low cost, POD and TOD accounts have some significant disadvantages in comparison to more sophisticated planning tools, such as revocable trusts. For one thing, unlike a trust, POD or TOD accounts won’t provide the beneficiary with access to the assets in the event you become incapacitated.
Also, because these assets bypass probate, they can create liquidity issues for your estate, which can lead to unequal treatment of your beneficiaries. Suppose, for example, that you have a POD account with a $200,000 balance payable to one beneficiary and your will leaves $200,000 to another beneficiary.
When you die, the POD beneficiary automatically receives the $200,000 account. But the beneficiary under your will isn’t paid until the estate’s debts are satisfied, which may reduce his or her inheritance.
Unequal treatment can also result if you use multiple POD or TOD accounts. Say you designate a $200,000 savings account as POD for the benefit of one child and a $200,000 brokerage account as TOD for the benefit of your other child.
Despite your intent to treat the two children equally, that may not happen if, for example, the brokerage account loses value, or you withdraw funds from the savings account. A more effective way to achieve equal treatment would be to list both assets in your will or transfer them to a trust and divide your wealth equally between your two children.
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