Payable on Death Account Pros and Cons

There are some significant disadvantages associated with payable on death (POD) accounts that you should be aware of. These include the inability to designate alternate beneficiaries, a lack of beneficiary rights, tax implications for beneficiaries,and limitations in account access due to incapacitation. While using a POD account to cover your final expenses may offer advantages, it isn’t always the ideal solution given the associated risks.

One major issue with POD accounts is that you cannot designate alternate beneficiaries if the named beneficiary dies before you. In this case, the funds in your account would be distributed to the beneficiary’s estate through the normal probate process, and you would be unable to name another beneficiary to receive the funds. To avoid this scenario, consider designating multiple beneficiaries on your account.

Another common drawback is the general lack of beneficiary rights while you are still alive. Since it is a POD account, your beneficiary cannot claim any funds until you pass away, even if you decide to release some of the funds before your death. Additionally, the funds from your POD account could be garnished by the courts if the beneficiary is the subject of adverse legal action.

Inheriting a POD account can also come with tax implications. While the value of the account itself isn’t included in taxable income and there are generally no federal inheritance taxes, various state tax laws may apply. You might also encounter estate and capital gains taxes. Moreover, if you have debts, those are typically paid from your estate before any distribution to beneficiaries, although they won’t be obligated to pay unless they are partly responsible for those debts, like if they co-signed a loan with you.

Lastly, it’s important to note that POD accounts cannot be accessed if you become incapacitated. Although the funds in a POD account may be intended to help cover medical costs, your beneficiary will not be able to access any of the funds while you are alive. As an alternative, consider storing funds in a joint bank account or establishing a trust, which might provide easier access in emergencies.

Sources

“Pros and Cons of Payable on Death Accounts”. LegalMatch. https://www.legalmatch.com/law-library/article/pros-and-cons-of-payable-on-death-accounts.html 

“Payable on Death Account Pros and Cons”. Final Expense Guy. https://fexguy.com/payable-on-death-account-pros-and-cons/ 

“Beneficiary Tax Obligations for Payable on Death Accounts”. The Balance. https://www.thebalancemoney.com/consequences-inheriting-pod-account-3505238#toc-estate-taxes 

“Pros and Cons: Payable on Death (POD) Accounts” Smart Asset. https://smartasset.com/estate-planning/payable-on-death 

A payable-on-death (POD) account (also known as a Totten Trust) is an excellent alternative to a preneed funeral plan. Essentially a savings account with a named beneficiary, it is easy to set up and has the added benefit of allowing you to maintain total control of whatever money you set aside until the time of your death. You don’t even need to open a new account if you already have money in savings that you want to use — just ask your bank for the appropriate paperwork, name the person you want to be your beneficiary, and you aree done. 

A Totten Trust is a fully revocable trust, so you can add money to it or take money out just as you would any bank account. Your beneficiary has no rights to the money while you are still alive. They cannot withdraw any funds from the account, nor does the balance count towards their assets (an important consideration if they get sued for any reason or run up debt they cannot pay). Further, you can close the account or change your beneficiary at any time. 

Another benefit of a Totten Trust is that the money in the account is exempt from probate, so your beneficiary will have access to the money shortly after your death. There may be a brief waiting period while the bank collects the necessary documentation (usually just a certified copy of the death certificate and identification for the beneficiary). But the money should be available by the time your funeral is arranged.

Yet another alternative to a preneed funeral plan is to open a joint savings account with a friend or relative. This is not quite as secure as a Totten Trust because the account and all the money in it will be owned by both of you, and the other person can withdraw funds without your knowledge or consent. If you choose this option, make sure the person with whom you open the account is someone you trust.

Sources

“What Is a Totten Trust?” NOLO. https://www.nolo.com/legal-encyclopedia/what-is-totten-trrust.html