Payable on Death Account vs. Transfer on Death Account

Avoiding probate is an important estate planning goal for many people. Although probate isn’t usually as burdensome as people fear, if you can transfer an asset more easily and directly, why not do so? Assets in a will have to go through probate, as does any property owned in your sole name if you don’t have an estate plan. “Payable on death” (POD) and “Transfer on death” (TOD) accounts are two ways to pass assets to your loved ones upon your death without probate.

What’s the Difference Between POD and TOD?

You may hear the terms “payable on death” and “transfer on death” used interchangeably, but in fact, there is some distinction between them. “Payable on death” usually refers to bank accounts, and nearly any kind of bank account can be payable on death. “Transfer on Death” is a term that more properly applies to stocks, bonds, and brokerage accounts.

Establishing an account as POD or TOD is generally simple. The bank or investment company will have you complete a form upon which you designate a beneficiary to become owner of the asset after your death. While you are not required to designate a beneficiary for most bank accounts, many investment companies and brokerages typically encourage you to designate a beneficiary as a matter of course when you open the account.

In Ohio, motor vehicles, all-purpose vehicles, and watercraft are also assets that can be transferred on death. You can apply for a certificate of title that will indicate the beneficiary who is intended to receive the vehicle upon your death. After your death, your beneficiary would apply for a certificate of title in their own name, submitting proof of your death in order to do so.

Is a Payable on Death Account the Same Thing as a Joint Bank Account?

Like a POD account, a joint bank account transfers to a survivor on an owner’s death without the need for probate. But there are some very important differences. With a POD account, your designated beneficiary has absolutely no legal right to the money in the account until after you have died. They cannot gain access to the account, and right up until your death, you can change beneficiaries or cancel the beneficiary designation altogether.

With a joint bank account, the joint owners both have a legal right to all funds in the account, even if only one owner contributed them. Let’s say, for example, that you intend to leave your savings account containing $50,000 to your nephew when you die, so you make the account joint, with both of you listed as owners. Your nephew could legally withdraw every cent in the account. Even if he would never do such a thing, his creditors could reach and claim the asset. If your nephew was sued and his creditor received a judgment against him, the joint bank account is legally one of his assets which his creditor could seize, even while you are still alive.

Unless you have a compelling reason to give your intended beneficiary access to your accounts during your lifetime, joint accounts are probably not the best way to go about making a non-probate transfer. A POD account offers more protection for you, but most estate planning attorneys consider a trust better than a POD or TOD account.

Advantages and Disadvantages of POD and TOD Accounts

As we’ve discussed, one of the primary benefits of a payable on death or transfer on death account is that they avoid probate and allow for a simple, straightforward transfer of assets without court involvement. Another advantage is the ability to name multiple beneficiaries. However, the same is true of trusts.

There can be some unintended consequences with POD and TOD accounts. For instance, let’s say you have two heirs, your adult son and daughter. Your will dictates that your estate should be divided evenly between them. However, you have forgotten that your daughter is named as beneficiary on your bank account and retirement account. When you set up the accounts you listed her as beneficiary without realizing that doing so would supersede your will with respect to those assets. At your death, those accounts will not be divided as part of your estate; they will be hers alone. However, she will still receive half of the assets in your probate estate, resulting in an unequal distribution between your children.

Also, if you name someone as a beneficiary on a POD or TOD account and they die before you, those assets will have to go through probate anyway, unless you have a contingent beneficiary. And if you have most of your assets tied up in POD and TOD accounts, there might not be enough money left in your probate estate to pay specific bequests (like “I leave $20,000 to my godson Barney.”). Likewise, there might not be enough money in the probate estate to pay debts and taxes.

If you have a family member with special needs, designating them as the beneficiary of your payable on death or transfer on death asset could result in them receiving a large amount of income all at once, which could jeopardize their eligibility for needed government benefits. Instead, you should consider a special needs trust for their benefit.

The long and the short of it is that payable on death and transfer on death accounts have their utility, but depending on your goals, there may be better options. Having a TOD or POD account with a designated beneficiary is better than having no estate plan at all, but you are better off with a comprehensive estate plan designed for your needs. To learn more, contact Gudorf Law Group to schedule a consultation.