someone assigning a beneficiary to their POD account.
Money Things

Can a POD account be contested? How to avoid beneficiary blunders

Money Things

Can a POD account be contested? How to avoid beneficiary blunders

When planning for your family's future, it's essential to understand the tools at your disposal that can help improve financial security. One such tool is a Payable-on-Death account, also referred to as a POD account, Totten trust, or even a Transfer-on-Death account (TOD). This type of bank account allows you to name a beneficiary who can inherit your funds when you pass away. This convenient and flexible option can come in the form of savings accounts, checking accounts, or investment accounts.

What sets a POD account apart from a traditional savings account is its ability to pass down finances quickly and potentially bypass the probate process. Probate is simply a process the courts undertake to distribute the estates of the deceased properly when there is no will. Knowing how to avoid probate can offer quicker access to funds when the owner dies, with just a death certificate. However, like any financial tool, POD accounts have the potential for disputes, otherwise known as "contesting” (a beneficiary designation). This post will outline what you can do to ensure your beneficiaries receive their intended inheritance with minimal chance of complications or contesting.

Main points

What is a POD account?: Payable on Death (POD) accounts, also known as Totten trusts or Transfer on Death (TOD) accounts, are flexible financial tools, like savings accounts, used for transferring funds to beneficiaries and bypassing the probate process.

Can POD accounts be contested?: Occasionally, POD accounts can be challenged due to family disputes, creditor claims, or questions about the account holder's intent. However, there are ways to reduce the odds of this happening. 

Steps to prevent contesting: To minimize disputes, ensure clear and specific beneficiary designations, maintain up-to-date and accurate records, and regularly review your financial decisions.

Importance of consistent estate planning: Align your POD account with your will and other estate planning tools to avoid legal conflicts. Be aware of how life insurance and other assets interact with your POD account.

Managing debts and taxes: Consider the impact of debts and taxes on your POD account. Plan for these contingencies to protect your beneficiaries’ inheritance.

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  1. What does it mean to contest a POD account?
  2. Can a POD account be contested? 
  3. Clear beneficiary designations
  4. Keep accurate records 
  5. Notify your beneficiaries
  6. Avoid conflicts with your will
  7. Settling debts and taxes
  8. Additional Considerations

What does it mean to contest a POD account?

Contesting a POD account is when someone challenges its validity or the rightful claim of its beneficiaries. It may seem like a messed up situation, but it happens quite more than you might think. It opens the doors to a wave of emotions and legalities that everyone involved must tread on. These disputes can emerge for many reasons, like if family members feel overlooked or unfairly treated or question the account holder's intentions or mental state at the time of designation.

Creditors might also contest these accounts, seeking to recover debts from the estate. They're like those uninvited guests at a dinner party, showing up at the most inconvenient times to bring about even more mayhem. "Remember that loan or bill so-and-so owed before they passed? Well, it's time to settle up!" This is why it’s so important to have clear, well-documented financial decisions, ensuring that your legacy is passed on as intended.

Can a POD account be contested? 

A common question among account holders concerning designating beneficiaries and mapping out a financial legacy is—“Can a POD account be contested?". In short: “yes,” though the rules can sometimes vary depending on your state. There are specific steps you can take to make this a less likely possibility.

How to avoid a POD account being contested  

1. Clear beneficiary designations

A POD account's effectiveness hinges on clear beneficiary designations. Simplicity is key here. You fill out forms at your bank to assign who inherits the account if anything happens to you. However, what you don’t want to do is be vague. Would you ever hop in a taxi and say, "Just follow the road?” to get home? Unless you live a block away, your best bet is to be precise about where you want to go. 

Treat your final wish instructions like a GPS that guides everyone else on what to do with your assets. Make what you want to happen specific in order to avoid conflicts and disputes. In addition, don’t forget to update your beneficiary information in response to substantial life changes. Providing explicit directions is essential to prevent legal challenges.

2. Keep accurate records 

As stated before, maintaining accurate records for your POD account is crucial. While banks generally update beneficiary information, personal records act as a safety net against institutional oversights. Avoid assumptions and be conscious that your financial protection plans reflect your current life situations. 

Digital tools like Savings+ can help streamline this process by allowing you to update beneficiary information online easily. Keeping up with your changing life and checking that your end-of-life financial goals are accurate will help ensure your family's needs are met.

3. Notify your beneficiaries

Informing beneficiaries about their designation in your POD account can help clear the air of any questions around this. Telling your beneficiary may seem like a no-brainer, but it isn’t uncommon for people to hold on to this information for a while before confronting their beneficiaries. Proactive communication ensures that beneficiaries are aware of their entitlements and reduces the likelihood of post-mortem legal challenges. 

4. Avoid conflicts with your will

A key aspect of managing a POD account is ensuring harmony between your will and other assets, like life insurance or POD savings. The rules regarding the different methods of financial protection can often differ and cause confusion. For example, a life insurance beneficiary designation typically supersedes will instructions. But it’s also important to know that some states can allow POD account challenges in court more easily than others. Consistency between your will and POD account minimizes the risk of legal disputes and assures your assets are distributed as intended.

5. Settle your debts and taxes

It's essential to understand how debts and taxes impact POD accounts and even the families of the deceased. Funds in a POD account may be used to settle outstanding debts, and beneficiaries might be liable for inheritance and estate taxes on the inherited amount. Preparing for these contingencies is crucial to ensure beneficiaries receive their due inheritance and not whatever residual is left after the creditors are done. You could acquire life insurance to settle debts in your absence or create a detailed financial plan that allocates funds specifically for debt repayment.

Additional Considerations

It’s always good to consider the legal differences of POD accounts by state and even the role of joint account holders. Don’t forget to explore all your alternative financial planning tools to see what’s a good fit. You may find a tool that complements or substitutes a POD account to help better protect your loved ones financially.

When managed effectively, POD accounts offer a streamlined way to transfer assets. By focusing on clear designations, accurate record-keeping, and harmonizing with other estate planning tools, you can minimize unnecessary conflicts and ensure your beneficiaries receive their inheritance as you intended. Proactive planning and professional advice are vital to achieving the peace of mind you deserve. 

See how Wysh can help you get started on your financial journey today.

The opinions we expressed in this post are for general informational purposes only and are not intended to provide specific advice or recommendations.