Pay on Death Accounts–Another Probate Avoidance Tool

You don’t always have to to have an expensive legal structure to pass on small amounts after death. Banks decided several decades ago that they wanted to let people avoid probate on their savings accounts.  They established what are called Pay on Death accounts or PODs.  In recent years, these types of accounts have also become known as Transfer on Death accounts.

When you establish a POD account, you are entering into a contract with the bank.  The contract says that upon your death the bank will pay out the money in the account to the individual(s) you have named on the contract.  This isn’t a trust.  It is simply a contract.

It is actually a reasonable probate avoidance tool, because when you die the money in the account is simply delivered to the named individual(s). However, there are several problems with the simplified concept of a POD. What happens if the individual has predeceased the bank account owner?  The bank won’t disburse the funds until it has a court order from the individual’s probate court judge.  That means the individual’s estate will have to be probated, even if the individual has set up a trust and done everything just right to avoid probate in his or her estate. In contrast, if the account was held in a trust rather than in a POD account, there would undoubtedly be a primary beneficiary and then contingent beneficiaries. This would avoid probate, even if one of the individuals that was supposed to receive the account had predeceased the account owner.

If you decide to use a POD account, periodically you should check the account and make sure the individual(s) that are named are still the one(s) you want to get the account after you die. Life’s changes such as death, divorce, or other changes could affect who you want the POD account to be paid out to.

For someone who basically only has a bank account and few other assets, a POD is a good avoidance tool.  It’s not as good as a revocable living trust, but it is a lot cheaper and a lot easier, so it certainly has its place in estate planning for smaller estates.