An essential part of any estate plan is ensuring that your assets are transferred to your chosen beneficiaries as smoothly and efficiently as possible. Payable-on-Death (POD) and Transfer-on-Death (TOD) accounts have gained popularity as simple and effective tools to achieve this. These types of accounts allow individuals to bypass probate and directly transfer assets to designated beneficiaries. However, while they offer distinct advantages, they also come with potential drawbacks and have the potential to upend your estate plan. Understanding the pros and cons of POD and TOD accounts is essential to making an informed decision about whether and how to include them in your estate plan.
What Are POD and TOD Accounts?
POD and TOD accounts are accounts with specific features offered by financial institutions that allow account holders to designate beneficiaries who will automatically receive the account’s assets upon the holder’s death. A POD account typically applies to bank accounts, while a TOD account is more commonly associated with securities, such as stocks, bonds, and brokerage accounts.
The Advantages of POD and TOD Accounts
1. Avoidance of Probate: One of the most significant benefits of POD and TOD accounts is that they bypass the probate process. Upon the account holder’s death, the assets transfer directly to the named beneficiary without the need for court involvement. This can save time, reduce legal fees, and maintain privacy.
2. Simplicity and Convenience: Setting up a POD or TOD account is typically straightforward. Most financial institutions offer these designations as an option, and updating beneficiaries can be done quickly using the financial institution’s form or through online banking features for your account.
3. Immediate Access to Funds: Because POD and TOD accounts avoid probate, the designated POD and TOD beneficiaries often gain access to the funds more quickly than they would if the same assets were passing under a will.
The Disadvantages of POD and TOD Accounts
1. Limited Scope: POD and TOD accounts only cover the assets held within the account. A POD designation on one bank account will not apply to your other assets such as real estate, business interests, or personal property. Relying on POD or TOD accounts alone may leave significant holes in your estate plan.
2. Lack of Flexibility: POD and TOD beneficiary designation forms offer limited options for who can receive the account and how upon your death. While you can change beneficiaries during your lifetime, the account does not allow for more complex distribution instructions, such as those found in a will or trust, like staggered distributions over time with a trustee in control, or contingent and successor beneficiaries in the event your primary beneficiary dies, or planning options for minor beneficiaries to avoid a court guardianship.
3. Potential for Disputes or Undue Influence: While POD and TOD accounts are fairly straightforward, they can sometimes lead to disputes among beneficiaries, especially if the designations are not in line with the rest of the estate plan. Because POD and TOD beneficiary designations are so simple to add to an account, whether by form or online, it is easy for individuals with access to those accounts to make changes that greatly alter your estate plan.
4. Lack of Coordination with Your Estate Plan: Often clients have a Will or Trust drafted with a well-thought-out estate plan for their children or grandchildren, but very few of their accounts then actually pass under the estate plan because all of their accounts have POD or TOD designations. For clients who wish to protect their beneficiaries from future creditors or divorce, or to provide for beneficiaries with special needs, it is important that their accounts do not include POD and TOD designations to these individuals. In those instances, it is important their accounts pass under the terms of their Will or Trust so that their estate plan is accomplished.
Conclusion
POD and TOD accounts can be helpful tools in an estate plan, offering benefits such as probate avoidance, simplicity, and cost savings. However, they are not without their limitations, and they are not the right solution for every estate plan. It’s crucial to evaluate these accounts in the
context of your overall estate plan and ensure they align with your broader goals, and more importantly – ensure they are not interrupting your broader goals. Consulting with an experienced estate planning attorney can help you determine if POD and TOD accounts fit into your strategy and whether they are the right choice for your situation.
If you have questions about how to title your bank and brokerage accounts, including whether POD and TOD accounts are the right fit for your estate plan, please contact us.
