What Does Payable on Death Mean? Definition + How It Works

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Payable on death (POD) accounts are an effective way to keep control of assets while you are alive while keeping your assets from the lengthy probate process when you die. With a POD bank account, you can pass property to a named beneficiary upon your death by simply notifying your bank of the person you want to receive the property when you die. 

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With a payable on death account, the bank will distribute the remaining property in the account to the person you named as the beneficiary on the account. There’s no need to become involved in the probate process. As you can imagine, this gives families a lot of relief in a time of crisis. 

However, there’s still a lot of confusion around what payable on death means, its definition, and how it works. Let’s discuss this topic in greater detail. 

Definition of Payable on Death (POD)

First, payable on death (POD) means that assets are paid to a designated person upon the death of the account owner. POD assets may be in the form of assets in a bank account or funds to be paid based on the terms of a specific plan or policy, such as life insurance proceeds. 

Even funds placed in trust for the benefit of another person may be considered “POD” if the terms of the trust provide for it. For any of these types of POD assets, ownership is automatically transferred to another party upon the death of the owner based on the terms of the account, policy, or trust that holds the assets.  

What’s the Difference Between Payable on Death, In Trust For, or a Beneficiary?

Next, payable on death accounts may be referred to by different names. For example, some financial institutions may refer to a POD account as a “totten trust” or an “ITF” (“in trust for”) account. 

You might also see your POD account referred to as an “informal trust,” “tentative trust,” or “revocable bank account trust.” All of these names may identify a standard POD account that pays benefits to a named beneficiary upon the owner’s death.

There are alternatives to POD accounts that work much the same way. For example, a revocable trust (which holds property “in trust for” a beneficiary) and a last will and testament (which names a “beneficiary” to receive property through the probate process) can function to transfer property to someone else when you die. 

However, these are different from POD accounts and follow different rules. Often, a POD account is much easier to create and is much more flexible in terms of transferring the property to the beneficiary when the account holder dies. If there’s any confusion about your account limitations, talk to your financial institution or insurance provider. 

Who Typically Uses Payable on Death Accounts?

With that in mind, who uses these accounts? POD accounts are most useful for someone who has property that they want to give to someone else (a beneficiary), but who also wants to use that property for themselves during their life. In other words, it delays the beneficiary’s access to the property until their death. 

By using a POD account, the account holder can transfer their property at death just like they would in a legal will but can avoid the delay and expense of the probate process to administer that property. Instead, upon the death of the account holder, the bank transfers any funds remaining in the account to the named beneficiary.  

What Are the Pros and Cons of Using a Payable on Death Account?

Before establishing a POD account at your bank, you should be sure that a POD account is the best option for what you are trying to accomplish. Although POD accounts offer several benefits, there also are some drawbacks. Here are some of the advantages and disadvantages of establishing a POD account that you should consider:

Pros of Using a POD Account

  • Simple to create:Unlike the alternatives, such as a will or revocable trust, POD accounts are easy to create. Your bank should have simple forms or signature cards with which you can identify the person to whom you want your account to be payable upon your death. That’s all it takes. Better yet, creating a POD account is usually free of charge. 
  • No restrictions: POD accounts also have no restrictions or limits on deposits. With a POD account, there is no limit to the amount of funds you can deposit into the account and no restriction on how you use the account during your life. You manage the POD account just like you would any other bank account in your name.
  • Multiple beneficiaries: With a POD account, you can name a single beneficiary or multiple beneficiaries. As a POD account owner, you can decide how the remaining funds in the account are distributed among the beneficiaries. During life, you can change the POD beneficiary as freely as you wish or terminate the POD nature of the account altogether.

Although POD accounts offer many advantages, a POD account may not be right for everyone. There may be some disadvantages to having a POD account.

Cons of Using a POD Account

  • No alternative beneficiaries: In a will or revocable trust, the property owner may name an alternate beneficiary to receive the property if the named beneficiary dies before the property owner. One of the drawbacks of using a POD account is that the account owner may not name an alternate beneficiary. Instead, if a beneficiary of a POD account dies before the POD account holder, the funds in the account will pass to the account holder’s estate when they die. 
  • Limited access: Named beneficiaries of a POD account have no rights to the property in the account until the account owner dies. During the account owner’s life, the account holder has sole access to the funds in the account and can use the funds as they wish. However, while the owner is alive, the beneficiary has no legal right to claim any property in the account.

Whether a POD account is right for you depends on what you want to accomplish with the account. The advantages usually outweigh the disadvantages. Even if there are disadvantages, they are easily overcome. Before you create an account, however, you may want to consult with an attorney to determine if a POD account is right for you. 

How Do Payable on Death Accounts Work After Someone Dies?

One of the most attractive features of a POD account is that it is easy for the beneficiary to collect the funds when the account holder dies. This is one of the advantages of using a POD account to distribute property upon death, as opposed to using a will or revocable trust.

Upon the death of the account owner, the beneficiary just needs to present to the bank proper identification and a death certificate for the deceased account owner. The bank will then release the funds to the beneficiary.

How to Set Up a Payable on Death Account

To set up a POD account, just open a new account at the bank and notify the bank that you want the funds held in the account to be paid to a named beneficiary upon your death. 

The bank will have you authorize the POD nature of the account with appropriate paperwork or signature cards. Generally, this is all you have to do to create a POD account. 

Frequently Asked Questions: Payable on Death Accounts

Using a POD account is a simple and effective way to transfer property at death. But using a POD account can affect other aspects of your estate plan. Here are some questions that people commonly ask about POD accounts and their relationship to other estate planning issues.

Do payable-on-death beneficiaries override wishes in a will?

You can transfer funds through a POD account and still have a last will and testament that disposes of property upon your death. If there is any conflict between your will and the terms of your POD account, the terms of the POD account will prevail. 

For example, if you have funds in a POD account and name a beneficiary of those funds, but in your will you name a different beneficiary of those same funds, the beneficiary named on the POD account will obtain the funds–not the beneficiary named in your will. 

The terms of the POD contract override the terms of a will. If you don’t want the person named on the account to receive the funds upon your death, you cannot use your will to change the beneficiary.; you must change the beneficiary designation on the POD account.

Is money transferred to a payable-on-death beneficiary taxed?

When you die, your estate will not have to pay taxes on the money in the POD account that gets transferred to the POD beneficiary. These funds are considered a “bequest” to the beneficiary. Bequests generally are not included as taxable income

However, all income that is placed in a POD account during the life of the account holder is considered taxable income to the owner. In addition, any income earned to the POD account between the time of the account holder’s death and the time that the beneficiary receives the property is taxed to the estate of the deceased POD account holder.

A Payable on Death (POD) Account May Be the Simplest Option for Transferring Funds to a Beneficiary upon Death

A POD account is a simple and effective way to transfer property to a beneficiary after you die, especially if you want to use the property during life and limit the beneficiary’s access to the property until your death. 

There are alternatives to a POD account, like a will or a revocable trust, that can accomplish the same goals, but POD accounts are much easier to create, more flexible, and less restrictive than other traditional estate planning tools.  

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