What Is Payable on Death (POD)?

Payable on death (POD) is an arrangement between a bank or credit union and a client that designates beneficiaries to receive all of the client’s assets. The immediate transfer of assets is triggered by the death of the client. Though morbid, these structures are important to understand.

Payable on death is also referred to as a Totten trust.

Understanding Payable on Death (POD)

An individual with an account or a certificate of deposit (CD) at a bank can designate a beneficiary who will inherit any money in the account after their death. A bank account with a named beneficiary is called a payable on death (POD) account. People who opt for POD accounts do so to keep their money out of probate court in the event that they pass away.

It is easy to convert an account to a POD account. Designating a beneficiary is a cost-free service that allows for the transfer of all checking and savings accounts, security deposits, savings bonds, and other deposit certificates by filling out the proper forms at your bank or credit union. The account holder needs only to notify the bank of who the beneficiary should be. The bank, on its end, will give the owner of the account a beneficiary designation form called a Totten trust to fill out. The completed form gives the bank authorization to convert the account to a POD.

The named beneficiary is not entitled to any of the money in the account while the account holder is still alive. Upon death, the beneficiary automatically becomes the owner of the account, bypassing the account holder’s estate and skipping probate completely. In the event that the owner of a POD account passes away with unpaid debts and taxes, their POD account may be subject to claims by creditors and the government.

If the account holder lives in a community property state, their spouse has a claim to half of the assets in the POD account, except the assets that were acquired before marriage or funds that were inherited.

If the account was jointly owned by more than one person, a named beneficiary cannot access the funds until the last owner dies. In this case, the assets in the account will be turned over to the beneficiaries named by the last surviving owner. There are no stipulations on the minimum amount of money that must be available in the account upon death. There are also no limitations to a POD account—the account holder can spend all the money prior to their death, change the beneficiary on the account, or close the account completely. To lay claim to the funds, the beneficiary has to present a government ID as proof of identity in addition to a certified copy of the death certificate.

Benefits of a POD Account

A significant benefit of POD accounts is that an account owner can increase their coverage limit under the Federal Deposit Insurance Corp. (FDIC). The standard coverage limit for an individual’s assets at a particular financial institution, including checking and savings accounts, money market accounts, and CDs, is $250,000.

Since a POD is a type of revocable living trust that has someone else with a beneficiary interest on the account, the FDIC provides up to $1,250,000 coverage on up to five accounts at a single bank where each account has a differently named beneficiary. Each beneficiary cannot be covered for more than $250,000. Instead of saving $1,250,000 in one account, which will only be insured for up to $250,000, having multiple POD accounts can increase an account holder’s coverage by up to five times the standard limit.

As a general rule, a POD account can have more than one beneficiary. However, if the account owner wants each beneficiary to receive unequal portions of the assets in the account, they must check that their state laws allow it, given that some states only permit an equal distribution of funds in a POD account.

It is important to note that a POD is more powerful than a last will and testament. If a POD account has one individual named as the beneficiary, and the will of the account holder lists another individual as a beneficiary, the POD-designated beneficiary prevails. The named beneficiary on the POD account is not required to honor the account holder’s last will and testament, which makes it imperative that the individual ensures to change or cancel the POD beneficiary if they have someone else listed on their will.

A POD account is very similar to a transfer-on-death (TOD) arrangement but deals with a person’s bank assets instead of their stocks, bonds, mutual funds, or other investment assets. Both POD and TOD agreements offer quick means of dispersing assets, as both avoid the probate process, which can take several months.

Drawbacks of a POD Account

The main drawback of a POD account is that it is not possible to name alternate beneficiaries to your account. If the person whom you nominated to receive the proceeds dies before you, then the contents of your account are automatically transferred to an estate or will. Naming multiple beneficiaries to the account can help offset this drawback.

Another drawback of a POD account is when there are taxes and loans to be paid out upon death as part of a bigger estate. The executor may find it difficult to settle these expenses using POD accounts.

Finally, naming multiple beneficiaries can complicate the process of dividing the proceeds from complex financial instruments, such as bonds. In some cases, the proceeds are a mix of CDs and other interest-bearing financial instruments. Divvying up their proceeds requires negotiations and compromises among beneficiaries.

The Bottom Line

POD account designations are important to set up on any bank accounts that an individual has to avoid the costs and delays involved with probate court. Unfortunately, many people don’t go to the trouble to make beneficiary designations when setting up accounts, and their heirs must incur the cost of probate upon the death of the account holder. This underscores the need for this element of estate planning.