POD and TOD Account Disadvantages

Probate Court

POD and TOD Accounts

What are POD and TODs? They are an increasingly popular method of providing for the distribution of financial accounts at your death. They are helpful in certain situations; however, there are critical limitations and risks associated with using them.

Payable of Death (POD)

A Payable on Death (POD) designation is commonly available at banks and used for checking and savings accounts and CDs. Other financial institutions usually use a Transfer on Death (TOD) designation. A POD and TOD are used to name a beneficiary for which the account balance transfers on death.

  • Advantages
    • Useful for transfer on death in smaller estates of less than $100,000 in total assets with no particular circumstances. (see below)
    • Appropriate for many checking accounts, particularly those held at Chase Bank, to avoid inconveniences.
    • It avoids Probate but comes with risks.
  • Disadvantages
    • Disinheriting: Regardless of the size of your estate, you might unintentionally disinherit a child or other intended beneficiary. Or the beneficiary might not share the funds with your other children as you had hoped. The account ownership automatically transfers to the only person(s) named on TOD or POD. These funds now become part of the named beneficiaries’ family estate if that person dies simultaneously with you or shortly after your death.
    • Creditors: Since the funds are owned by your beneficiary immediately, they are also subject to any creditor claims, lawsuits, or divorce filed against the beneficiary.
    • Minors: Like with life insurance policies, deferred compensation accounts, and IRAs or other beneficiary designations. If the beneficiary is under 18 at your death, the proceeds or funds go to Probate.
    • Disability: If your beneficiary has a disability now or acquired one from an accident or illness before your death, In that case, the POD and TOD funds could end up with the government or jeopardize their Medicaid and SSI.
    • Predeceased Beneficiary: The funds are subject to Probate if your beneficiary dies with you or before your death. There are no alternate beneficiaries on TOD/POD accounts.
    • Squandering Inheritance: Statistics show that most inheritance is spent within 18 to 36 months. I am confident the shorter the time, the younger the beneficiary.

POD vs. Living Trusts

I write about Living Trusts frequently because they are much more than an estate plan. Living Trusts organize your assets now and safeguard them after your death. They also can avoid all of the above disadvantages of POD/TOD designations.

Living Trusts also protect your assets from Guardianship Court if you acquire a disability. Additionally, if you are contemplating a second marriage, a Living Trust is essential to segregate your assets from future marital funds for prenuptial protection.   

Living Trusts, if Not Now, When?

We all know that we need an estate plan, and we should take care of it sooner rather than later. However, almost everyone procrastinates when it comes to this essential task.

At the end of your life or incapacitation, they risk Probate if you have property, investments, or bank accounts in your name.

Advantages of a Living Trust

  • A Will is Probate. The rule is no one can legally sign your name. Therefore, all assets in your name are subject to the Probate process, which averages 18 months and is costly.
  • A Living Trust completely avoids Probate.
  • Your financial accounts, life insurance policies, and deferred compensation accounts can name your Living Trust as the beneficiary. This is subject to essential tax considerations.
  • A Living Trust estate plan includes Health Care and Financial Power of Attorney documents. It also consists of a Last Will and Testament. A Will is necessary for the guardianship of minor children. It also transfers assets in your name out of Probate.
  • A Living Trust contains a No Contest provision and beneficiary Asset Protection clauses.

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Tom Tuohy is the founder Tuohy Law Offices.

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