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What’s so Bad About Payable on Death (POD) Accounts?

By September 13, 2013Estate Planning

Within the last couple weeks I have been asked the same question at least three times, so in case anyone else out there wants to know the answer, I thought I’d share it in a blog post.

The issue is whether or not it is a good idea to own an asset that is titled as a Payable on Death (POD) account. As is often the case with legal questions, the answer is: it depends. For those who don’t recognize the phrase “Payable on Death,” the account is usually better known as an account that has a beneficiary listed, with the purpose of the designation being that the beneficiary receives all the proceeds in the account upon the death of the account holder (if there was only one listed), or upon the last death of all the account holders (if there were more than one).

One major benefit of this type of account designation is that it avoids probate on those specific assets. Because there is a beneficiary already listed when the account holder dies, the money can go directly to the beneficiary and a probate court isn’t needed to determine where it should go.

Other benefits of this type of account titling are that it is relatively easy to set up and it is a decently fast way to transfer funds after the account holder has passed. Typically all that is required by the beneficiary is proof of death, usually with a death certificate.

That all sounds great, right? So what could go wrong with that, you ask? Just as there are inherent benefits of POD accounts, there are inherent disadvantages. First, the money in the account is not available to the beneficiary until the accountholder passes away. That sounds pretty straightforward, but imagine a scenario where a father has all of his accounts payable on death to his son, but the father becomes incapacitated and cannot handle his own affairs. Unfortunately, the son will not have access to any of his father’s money to provide needed care and assistance. The son would only have access to the funds after the father passes.

Second, the money that is given to the beneficiary is not protected. What I mean by that is that once that money hits the beneficiary’s bank account, it is his or her money and he or she can spend it at will (if they are of legal age, of course). There is typically no oversight or restrictions to safeguard what is done with the money.

However, don’t fall into the trap of thinking that rather than making a son or daughter a beneficiary of your account it might just be better to make them an actual signer on the account. The answer here (again) is: it depends. The benefit of doing this is allowing your son or daughter instant access to your funds should you become incapacitated (like the example above), but this action also increases your risk. If you add your son to your account and your son gets into a nasty car accident and is subsequently sued, your bank account could become subject to a creditor and/or lawsuit, even though the funds are technically yours.

So what can be done? While one answer won’t fit every situation, a trust typically alleviates all the issues that were discussed here, while still providing all the benefits. The person who creates the trust gets all the benefits of maintaining control over his or her assets, and contingencies can be set up so that if the worst happens, money can be accessed and the situation can be handled.

If you’d like to know if a trust is right for you, please schedule a free consultation today by calling 888.222.1328. You’ll never know until you ask!

MH_iphone_splashWhat the Attorneys of Morris Hall Can Do For You:
The attorneys at Morris Hall have 100’s of years of combined experience ensuring that families’ assets are protected from probate, unnecessary taxes, creditors, ex-spouses and Medicaid spend-down.  The attorneys also help those in Arizona and New Mexico to apply for and receive Medicaid assistance and Veterans Benefits.  Our Arizona offices are located in Phoenix, Mesa, Scottsdale, Cave Creek, Tucson, Prescott, Flagstaff and Arrowhead.  Our New Mexico offices are located in Albuquerque, Las Cruces and Santa Fe.  Contact us today at 888.222.1328 to schedule an appointment!

This blog should be used for informational purposes only.  It does not create an attorney-client relationship with any reader and should not be construed as legal advice.  If you need legal advice, please contact an attorney in your community who can assess the specifics of your situation.


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