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

Within the last couple of 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 best share it.

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," it is an account with a beneficiary listed that will receive all the proceeds in the account upon the death of the account-holder(s).

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(s) dies the money can go directly to the beneficiary and a probate court isn’t required to direct the funds.

Other benefits of this type of account titling are that it is relatively easy to set up and is a decently fast way to transfer funds after the account-holder(s) 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 account-holder(s) passes away. That sounds 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 away, preventing him from using them for his father's needs during his life.

Also, 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. When asked if this is a good choice, the answer here (again) is, "it depends." The benefit of doing this is that it allows your son or daughter instant access to your funds should you become incapacitated (like the example above). Unfortunately, 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 to maintain 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. It also handles the distribution of the assets without the probate court's interference, and provides important protections for the assets and your loved ones.

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_splashAbout Morris Hall:
At Morris Hall, we have focused our legal practice on estate planning for over 40 years.  Along with estate planning, our attorneys help clients and their families with matters of probate, trust administration, wills, power of attorneys, business planning, succession planning, legacy planning, charitable gifting and other important legal aspects.  We also have divisions in financial, real estate and accounting to help you incorporate all of your planning together, ensuring that everything works perfectly for your needs and situation. Our Arizona offices are located in Phoenix, Mesa, Scottsdale, 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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