It’s never too early to think about your estate and estate planning, especially how you’re going to transfer assets from your accounts to your beneficiaries. One financial tool to consider, if you haven’t already, are payable on death bank accounts. These can be easy and seamless ways to transfer your bank assets to the beneficiary of your choosing for when you pass away.
This Wysh guide is all about payable on death (POD) bank accounts, how you set them up and the advantages and disadvantages of these tools. We’ll also discuss some similar account types, such as In Trust For (ITF) accounts. By the end you’ll have a clear understanding of payable on death accounts and how it all fits with your goal of financial protection.
The Wysh Blog
- What does POD stand for?
- What is POD (Payable on Death)?
- Details of a payable on death bank account
- How to open a payable on death bank account
- Are payable on death bank accounts taxable?
- Payable on death bank accounts Pros vs Cons
- In Trust For vs Payable on Death
- Payable on death accounts vs life insurance
- Life insurance from Wysh
What does POD stand for?
POD is simply the acronym for “payable on death.” Payable on death accounts are also commonly referred to as “Totten Trusts,” named after the 1904 New York court case called In re Totten.
Additional names include “revocable bank account trusts” or “transfer on death accounts.” If you see names for things like a “Totten Trust” or a “Transfer on Death Account” then just know that they’re the same as a payable on death account.
What is POD - payable on death
POD is simply the acronym for “payable on death.” A payable on death account is a legal contract or arrangement between a financial institution and you, the client. With a payable on death account, you, as the client, can designate specific beneficiaries who will receive the account’s assets when you die. This kind of designation is a direct transfer which means it skips the probate process.
Payable on death accounts can be set up for accounts such as checking and savings accounts, Certificate of Deposits, money markets and savings bonds. Payable on death accounts also typically override Wills or other estate planning documents, such as a trust.
Details of a payable on death bank account
It’s not just important to know what payable on death bank accounts can do, but also what they cannot. For example, a beneficiary has no access to a payable on death bank account until the account holder in question dies. In order to claim access to the assets in the account, the beneficiary would have to show proof of identity and a certificate of death of the account holder.
If the account holder lives in a community property state, their spouse typically has legal claim to half the assets in the account. And if the account is a joint account, then the beneficiary would have to wait until both names on the account are deceased before they can access the assets.
How to open a payable on death bank account
Opening a payable on death bank account is fairly simple. You can add a POD designation to a checking, savings, certificate of deposit, individual retirement account (IRA) or investment account.
- Request paperwork from your bank or credit union.
- Choose your beneficiary and fill out the form. Information you may need to provide could include your intended beneficiary’s name, address, Social Security number and date of birth.
- Return the paperwork to your bank, credit union or financial institution.
There are no fees for opening a POD account either. All you’ll need to do is fill out and return the paperwork and your POD account should be good to go.
Are payable on death bank accounts taxable?
Payable on death bank accounts are subject to being taxed, yes. Though they bypass the probate process, the assets within a payable on death bank account are still considered part of the account holder’s estate for tax purposes.
So beneficiaries may have to pay inheritance tax in their state. Not every state has an inheritance tax and the tax doesn’t apply if the POD account comes from a spouse.
Payable on death bank accounts Pros vs Cons
Like other financial tools, payable on death bank accounts come with their advantages and disadvantages. Here are some payable on death bank accounts pros and cons you should consider:
There are additional advantages and disadvantages of payable on death bank accounts out there. For example, if your POD bank account is your primary account, then problems may arise when beneficiaries try to access it on your behalf, say in instances of incapacitation. It’s important to know the ins-and-outs of payable on death bank accounts before jumping into one.
In Trust For vs Payable on Death
In Trust For (ITF) accounts are similar to payable on death accounts in that both have named beneficiaries. However, ITF accounts also have named trustees who manage the account on behalf of the one or more named beneficiaries.
But, Wysh, we hear you ask, if a payable on death account transfers money to a beneficiary directly, why would I want or need to have a trustee over the account? It’s a good question.
Having a trustee can act as a form of asset protection. This can be helpful when you want to exclude property or assets from your estate’s total value, so you can lower your estate tax in states where there’s no inheritance tax. Creating this kind of legal distance can help protect the assets from creditors.
What can be placed into an ITF account? Well things like:
- Real estate
- Life insurance policies
- Antiques and/or collectibles
- Investment accounts
Ultimately, the main difference between POD and ITF is that POD accounts are typically for bank assets and ITF accounts are more for investment assets, though both may be used for most assets.
Payable on death accounts vs life insurance
Are payable on death accounts better for you than life insurance? It’s not as simple as an “either or” situation. Payable on death bank accounts can be easy and free to set up and they can do a lot for you. But they can’t easily replace the protection provided by term life insurance.
See, the beneficiary of a POD account gets the assets that are in your account, meaning whatever money is in there gets transferred. If there’s a lot of money in the account, that’s great. It’s not as great if the account doesn’t have enough assets to cover the costs the beneficiaries were looking to cover. Don’t forget that POD accounts may be subject to your state’s inheritance tax as well, while term life insurance death benefits are generally exempt from being included in gross income. Which means they are generally not taxable.
However, it’s important to know how payable on death bank accounts would work for your financial situation. Both may be beneficial to your plans, short- or long-term. The important thing is to be aware, knowledgeable and above all else, proactive.
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- What is POD? POD = Payable on death account
- ITF = In Trust For account
- Payable on death accounts may also be called Totten Trusts, recoverable bank account trusts and transfer on death accounts
- POD accounts are free to open
- They (POD accounts ) bypass the probate process and are direct transfers to beneficiaries
- They (POD accounts) can still be subject to state inheritance taxes
- Can’t add multiple beneficiaries to same account
- POD accounts typically override wills and other estate planning documents, such as a trust