How Do You Make A Bank Account Payable On Death?

Opening a Payable On Death (POD) Bank Account: A Comprehensive Guide

Planning for the future involves many important considerations, and one key aspect is ensuring a smooth transfer of assets to your loved ones after you're gone. A Payable On Death (POD) bank account offers a simple and effective way to achieve this. This guide provides a detailed explanation of how to create a POD account, its benefits, and important factors to consider.

What is a Payable On Death (POD) Bank Account?

A Payable On Death (POD) account, also known as a Totten Trust in some jurisdictions, is a bank account that allows you to designate one or more beneficiaries who will automatically inherit the funds in the account upon your death. This transfer happens outside of the probate process, making it a quicker and often less expensive way to pass on assets compared to a will.

Think of it as a built-in beneficiary designation directly linked to your bank account. Instead of your will dictating who receives the money, the POD designation takes precedence for that specific account.

Benefits of a POD Account

Avoids Probate: The most significant advantage is bypassing probate. Probate can be a lengthy and costly legal process, especially for larger estates. POD accounts allow your beneficiaries to access the funds relatively quickly and easily, often within a few days or weeks.
Simple to Set Up: Establishing a POD account is usually a straightforward process. Most banks and credit unions offer this option, and the paperwork is generally minimal.
Flexibility: You retain complete control of the account during your lifetime. You can deposit, withdraw, or close the account without needing the beneficiary's permission. You can also change the beneficiary designation at any time, as long as you are competent.
Privacy: Because the funds transfer outside of probate, the details of the account and its beneficiaries remain private. Wills, on the other hand, become public record during probate.
Cost-Effective: There are typically no fees associated with establishing or maintaining a POD account. The only cost is the time it takes to complete the necessary paperwork.
Supplemental to a Will: A POD account works in conjunction with your will, not in place of it. It provides a specific mechanism for transferring certain assets (bank accounts) quickly, while your will covers the distribution of your remaining assets.

Steps to Make a Bank Account Payable On Death

1. Choose a Bank or Credit Union

Begin by selecting a bank or credit union that offers POD account designations. Most financial institutions offer this option, but it's always a good idea to confirm before proceeding. Consider factors like interest rates, fees (although rare for POD features), accessibility, and customer service when making your choice.

2. Open an Account (If You Don't Already Have One)

If you don't already have an account with the chosen bank or credit union, you'll need to open one. This typically involves providing personal information, such as your name, address, Social Security number, and a valid form of identification. You'll also need to make an initial deposit to fund the account.

3. Designate Beneficiary(ies)

This is the crucial step! Inform the bank that you want to designate the account as Payable On Death and provide the full legal names, addresses, dates of birth, and Social Security numbers (or tax identification numbers) of your chosen beneficiary(ies). Be as accurate as possible to avoid potential complications later on.

Most banks have specific forms for POD designations. You'll need to complete this form accurately and sign it in the presence of a bank employee or notary public, depending on the bank's requirements.

4. Determine Beneficiary Allocation (If Multiple Beneficiaries)

If you're naming multiple beneficiaries, you'll need to specify how the funds will be divided. You can choose to allocate equal shares or designate different percentages for each beneficiary. Ensure the allocation percentages add up to 100%.

For example, you might designate 50% to your spouse and 25% to each of your two children. Be clear and unambiguous in your instructions to prevent disputes among the beneficiaries.

5. Sign and Submit the POD Designation Form

Carefully review the completed POD designation form to ensure all information is accurate. Once you're satisfied, sign the form and submit it to the bank. The bank will then update the account records to reflect the POD designation. Retain a copy of the completed form for your records.

6. Keep Your Beneficiary Information Up-to-Date

Life circumstances change. It's essential to periodically review your beneficiary designations and update them as needed. Changes in marital status, births, deaths, or changing relationships may necessitate revisions to your POD designations. Inform the bank promptly of any changes to ensure your wishes are honored.

7. Inform Your Beneficiaries (Optional but Recommended)

While not legally required, it's a good idea to inform your beneficiaries about the POD account and its existence. This will make the process much smoother for them after your death. Provide them with the name of the bank, the account number (though not necessarily all the details), and instructions on how to claim the funds.

Important Considerations and Potential Pitfalls

Contingent Beneficiaries: Consider naming contingent beneficiaries. These are individuals who will inherit the funds if your primary beneficiary(ies) predecease you. Without a contingent beneficiary, the funds will likely become part of your estate and be subject to probate.
Minors as Beneficiaries: Naming a minor as a direct beneficiary can complicate matters. A legal guardian or custodian will need to be appointed to manage the funds on the minor's behalf until they reach the age of majority. Consider establishing a trust to manage the funds for the benefit of the minor instead.
Beneficiaries with Special Needs: If you have a beneficiary with special needs who receives government benefits, inheriting funds directly could jeopardize their eligibility. Consult with an estate planning attorney to explore options such as establishing a special needs trust to protect their benefits.
Joint Accounts vs. POD Accounts: A joint account with rights of survivorship automatically passes to the surviving owner(s). While it avoids probate, it also gives the joint owner immediate access and control over the funds. A POD account, on the other hand, allows you to retain complete control during your lifetime, and the beneficiary only gains access after your death.
Taxes: While the funds in a POD account are not subject to estate taxes in many cases (depending on the size of your estate and applicable state and federal laws), they may be subject to income taxes when the beneficiary withdraws the funds. Consult with a tax advisor for personalized guidance.
State Laws: State laws governing POD accounts can vary. It's essential to familiarize yourself with the laws in your state to ensure your POD designation is valid and enforceable.
Creditor Claims: In some states, creditors may be able to make a claim against the funds in a POD account to satisfy outstanding debts of the deceased. Consult with an attorney to understand the potential impact of creditor claims on your POD account.
Accuracy is Key: Ensure all information on the POD designation form is accurate and up-to-date. Errors or inconsistencies can lead to delays or complications in the distribution of funds.

Alternatives to POD Accounts

While POD accounts are a convenient option for transferring bank account funds, other estate planning tools may be more suitable depending on your specific circumstances.

Living Trust: A living trust allows you to transfer assets into a trust during your lifetime. The trust owns the assets, and you can name yourself as the trustee and beneficiary. Upon your death, the successor trustee will manage the assets according to the terms of the trust, avoiding probate. Living trusts offer greater flexibility and control compared to POD accounts and can be used to manage a wider range of assets.
Will: A will is a legal document that outlines how you want your assets to be distributed after your death. While a will is subject to probate, it allows you to specify beneficiaries for all of your assets, including those not covered by POD accounts or other beneficiary designations.
Joint Ownership with Rights of Survivorship: As mentioned earlier, joint ownership with rights of survivorship automatically transfers the asset to the surviving owner(s). This can be a simple way to transfer assets, but it also gives the joint owner immediate access and control.

When to Consult with an Estate Planning Attorney

While setting up a POD account is relatively straightforward, it's always a good idea to consult with an estate planning attorney, especially if:

You have a complex estate with significant assets.
You have beneficiaries with special needs.
You want to establish a trust.
You want to minimize estate taxes.
You have concerns about creditor claims.
You live in a state with complex estate planning laws.
You want personalized advice tailored to your specific circumstances.

An estate planning attorney can help you develop a comprehensive estate plan that addresses all of your needs and ensures your wishes are honored.

How Beneficiaries Claim Funds from a POD Account

The process for beneficiaries to claim funds from a POD account is typically straightforward. Here's a general overview:

Notify the Bank: The beneficiary should notify the bank or credit union of the account holder's death.
Provide Documentation: The beneficiary will typically need to provide a certified copy of the death certificate and their own identification (driver's license, passport, etc.).
Complete Claim Forms: The bank will provide the beneficiary with any necessary claim forms to complete.
Verification and Payment: The bank will verify the information and, once satisfied, will release the funds to the beneficiary. The method of payment may vary (check, wire transfer, etc.).

The exact requirements may vary depending on the bank's policies and state laws. It's always best to contact the bank directly for specific instructions.

Updating Beneficiary Designations After Major Life Events

Major life events, such as marriage, divorce, the birth of a child, or the death of a beneficiary, should trigger a review of your beneficiary designations. Failure to update your designations can have unintended consequences.

Marriage: If you get married, you may want to add your spouse as a beneficiary to your POD account.
Divorce: If you get divorced, you will likely want to remove your former spouse as a beneficiary. Note that some states have laws that automatically revoke beneficiary designations to a former spouse upon divorce, but it's always best to update the designation explicitly.
Birth of a Child: If you have a child, you may want to add them as a beneficiary.
Death of a Beneficiary: If a beneficiary dies, you will need to remove them from the POD designation and consider naming a contingent beneficiary.

Regularly reviewing and updating your beneficiary designations is an essential part of responsible estate planning.

Common Mistakes to Avoid When Setting Up a POD Account

While POD accounts are relatively simple, there are some common mistakes to avoid:

Failing to Designate a Beneficiary: The most common mistake is failing to designate a beneficiary altogether. If you don't name a beneficiary, the funds will become part of your estate and be subject to probate.
Providing Inaccurate Information: Providing inaccurate or incomplete information about your beneficiaries can lead to delays or complications in the distribution of funds.
Not Keeping Beneficiary Designations Up-to-Date: Failing to update your beneficiary designations after major life events can result in unintended consequences.
Not Informing Beneficiaries: While not legally required, not informing your beneficiaries about the POD account can make the process more difficult for them after your death.
Not Coordinating with Your Overall Estate Plan: A POD account should be coordinated with your overall estate plan to ensure all of your assets are properly distributed according to your wishes.

Navigating Multi-State Residency and POD Accounts

If you have residency in multiple states, it's important to consider how this might impact your POD accounts. Generally, the laws of the state where the bank account is located will govern the POD designation. However, your domicile (your permanent legal residence) may also play a role in estate tax implications.

It's best to consult with an estate planning attorney who is familiar with the laws of all states where you have residency to ensure your POD accounts are properly structured and integrated with your overall estate plan.

Dealing with Unclaimed Funds in POD Accounts

Occasionally, funds in a POD account may go unclaimed if the beneficiary is unaware of the account's existence or cannot be located. These unclaimed funds typically escheat (revert) to the state after a certain period, usually several years. The state then holds the funds until the rightful owner (or their heirs) claims them.

To avoid this situation, it's crucial to inform your beneficiaries about your POD accounts and provide them with the necessary information to claim the funds. You should also keep your beneficiary information up-to-date with the bank.

The Role of Executor/Administrator in POD Account Transfers

While POD accounts bypass probate, the executor or administrator of the estate still plays a role in ensuring the transfer of funds. The executor/administrator is responsible for notifying the bank of the account holder's death and providing the necessary documentation. They also ensure that the transfer is properly documented and reported to the relevant authorities.

Digital Assets and POD Accounts: A Modern Consideration

In today's digital age, many individuals hold significant value in digital assets such as cryptocurrency, online accounts, and digital content. While POD accounts are designed for traditional bank accounts, it's important to consider how to manage your digital assets as part of your estate plan.

You may want to consider creating a digital asset plan that outlines how you want your digital assets to be accessed and distributed after your death. This plan can be incorporated into your will or living trust. Some platforms also offer tools for designating beneficiaries for digital assets.

Conclusion

In summary, establishing a Payable On Death (POD) bank account is a relatively simple yet powerful tool for estate planning. It allows your designated beneficiaries to inherit the funds in the account quickly and efficiently, bypassing the often lengthy and costly probate process. While POD accounts offer numerous benefits, it's important to understand their limitations and potential pitfalls. Careful planning, accurate beneficiary designations, and coordination with your overall estate plan are essential to ensure your wishes are honored and your loved ones are protected. Consult with an estate planning attorney to determine if a POD account is the right choice for you and to develop a comprehensive estate plan that meets your specific needs and goals.