A Payable-on-Death (POD) designation is a form of beneficiary designation. It can be used to liquidate and “pay” the balance of a bank account or certificate of deposit to a named beneficiary in the event of the account holder’s death. A POD designation is added to an account by using a signature card or similar form provided by the financial institution. As long as you are alive, the person named as the beneficiary has no access to the account. The funds are only accessible by or paid to the beneficiary at the account holder’s death.
The primary advantage of a POD designation is that it is simple to establish and use. A POD can be added to a bank account free of charge. The designated beneficiary generally has access to the account with proof of identity and a certified copy of a death certificate. This quick-access to funds can provide needed liquidity for funeral or other final expenses. There is no need for an attorney or court approval, as is often the case with probate assets. POD’s can also be difficult to contest because they transfer by operation of law, which means that they bypass your estate.
While POD’s can provide a number of advantages, they also come with certain disadvantages. Because the payout bypasses your estate, the transfer could contradict instructions in your will about how you wanted certain assets distributed. POD’s can also ignore named, but deceased beneficiaries. Meaning that should a beneficiary predecease you, his or her share of the asset will be transferred only to the surviving beneficiary. This could inadvertently lead to disinheriting an otherwise intended beneficiary, such as a grandchild, for example. POD designations are also only available for certain types of assets. In many cases, the availability of POD will depend on your state law.
Another significant disadvantage of a POD is that it provides no protection in the case of incapacity. As the title implies, Pay-on-Death designations only take effect upon “death,” and not upon incapacity. As a result, your beneficiary will not have access to the funds should you become incapacitated.
While TOD’s can be an effective tool in the estate planning process, both their advantages and disadvantages should be carefully considered before naming a POD beneficiary.