by Thomas D. Begley, Jr., Esquire, CELA

What are POD and TOD Accounts?

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A POD accounts stands for “payable on death” and is usually used with bank accounts such as checking, savings or Certificates of Deposit. TOD are “transfer on death” accounts and are usually used with brokerage accounts, stocks, bonds and other investments. These accounts are used to keep monetary assets out of probate. The principal (accountholder) establishes a beneficiary designation on the account, and the financial institution transfers the funds to the beneficiary on the death of the principal.

POD and TOD accounts do not pass through the probate estate. They are non-probate assets and are paid directly to the beneficiary or beneficiaries of the account.

Claimed Advantages of POD and TOD Accounts

• Avoids Probate. Proponents of POD and TOD accounts claim that these accounts avoid probate. Is this true? The answer is it is partly true. Very few people have all of their accounts titled as POD or TOD accounts. They likely have a house, car, and even other financial assets that are not designated as POD or TOD accounts. Therefore, probate is still necessary. Probate in New Jersey is probably as simple as any state in the Union. The costs of probate are relatively low, except for potential executor’s commissions. Again, executors are usually family members, often beneficiaries, and usually do not take executor’s commissions because they would have to pay income tax on money they are getting anyway as beneficiaries. If there is an executor who is likely to charge commissions, these commissions can be avoided by using POD and TOD accounts, because they would not be part of the probate estate.

• Access to Principal. Proponents of POD and TOD accounts also claim that an advantage of these accounts is that as long as the principal is living, he or she can easily access those accounts. The counter argument is that as long as he or she is living, the principal could easily access the accounts even if they were not POD or TOD accounts.

• Multiple Beneficiaries. Proponents of POD and TOD accounts claim that an advantage of these accounts is that multiple beneficiaries can be named on death. Again, the principal of a bank account or investment account can name multiple beneficiaries in his or her Will or Living Trust to receive those accounts on death.

• Claiming the Money. Proponents of POD and TOD accounts claim that it is easy for the beneficiary of the account to claim the money on the death of the principal. This is true, if the beneficiary of the POD or TOD account is an individual. Generally, the financial institution will only require proof of identification, a death certificate, and a completed L8 form to release the funds. However, if the beneficiary is a trust, an L8 cannot be used. Often it makes sense to leave money to beneficiaries in a trust. This would certainly be true in the case of minors and incapacitated individuals, and many clients want to consider Bloodline Trusts for competent adult beneficiaries to protect them from creditors and divorce and to ensure that the client’s money is kept in the bloodline. POD and TOD accounts would not be useful in these situations.

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Disadvantages of POD and TOD Accounts

• Unintended Consequences with Overall Estate Plan. Very frequently clients open a POD or TOD account naming one child as beneficiary and then execute a Will or Living Trust naming multiple children as equal beneficiaries. The client usually does not realize that the POD or TOD account naming one child as beneficiary overrides the Will or Living Trust and does not include an equalization provision in those documents. The result is that children do not receive equal shares.

On rare occasions, one or more children are even disinherited because one or less than all children are named as POD or TOD beneficiaries on all of the client’s financial accounts and the client does not own assets other than those accounts.

• Special Needs. If an individual with special needs who is receiving means-tested public benefits, such as SSI and Medicaid, and that individual is named as a beneficiary of a POD or TOD account, receipt of those funds will disqualify the individual from those means-tested public benefits. The solution would be to name a Special Needs Trust as beneficiary of the POD or TOD accounts, but an L8 could not be used in those situations.

• Payment of Debts. If all or virtually all of the decedent’s assets are POD and TOD accounts, there would be no money to go into the estate to pay the debts of the beneficiary. It should be noted that creditors do have a right to claim against POD and TOD accounts.

• Estate and Inheritance Taxes. If virtually all of the decedent’s assets are POD and TOD accounts, there would be no money available to the estate for payment of estate or inheritance taxes. These taxes are still due from POD and TOD accounts. Also, in that situation the client would not have the ability in a Will or Living Trust to allocate from what assets estate or inheritance taxes should be paid. Often, the client wants those taxes paid out of the estate before distribution to beneficiaries.

• Specific Bequests. If a client makes specific bequests in a Will or Living Trust and all or virtually all of the client’s assets are in POD or TOD accounts, there may be no money in the estate to pay those specific bequests.

No Contingent Beneficiaries. Where there is a POD or TOD account beneficiaries can be named, but no contingent beneficiaries can be designated. Therefore, if one or more of the POD or TOD beneficiaries predecease the principal, monies do not go to the named beneficiaries but rather are paid to the estate of the decedent

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