With either a transfer-on-deth or a payable-on-death account, you are in control. The assets in the account pass directly to your named beneficiary and bypass probate, the court proceeding that validates your will after your death and transfers property to your heirs after debts and taxes are paid.
Your will doesn't control who inherits a POD or TOD account (sometimes called a Totten trust), so when you set one up, make sure its provisions reflect your intentions.
With a POD/TOD account you can name a new beneficiary at any time, you don't have to leave anything in it, and your beneficiary's creditors cannot grab the assets in your account while you are alive.
For the beneficiary, the appeal is its simplicity: After your death he or she can claim the assets with proof of identity and a death certificate.
Joint versus POD/TOD?
Joint-ownership accounts are traditionally used by husbands and wives. In most cases, they are important financial tools and work as intended. But for some married couples and single people, joint accounts may not be appropriate.
Because joint bank accounts are generally set up so that the surviving owner receives the entire balance upon the death of the co-owner, some assume that there's little difference between joint and POD/TOD accounts. Not so.
In both types of accounts, the assets bypass probate when the first joint owner or POD/TOD owner dies, but beyond that there are important distinctions. The legal requirements of joint ownership with the right of survivorship can have unanticipated consequences, including:
Loss of control. Each owner in a joint account with survivorship normally has full access to the assets and to any income it produces. If you want to close a joint savings account, for example, you'll need the other owner's permission.
Loss of part or all of your property. Requiring both owners to approve closing a joint account can be a moot point. A co-owner has the legal right to spend all the money in your account without your permission. In addition, your joint owner's creditors can target the account.
Points to ponder
POD/TOD accounts obviously have advantages, but before you set up multiple accounts, consider these points:
- Will you want to name more than one beneficiary? As a general rule, you can name more than one beneficiary on a POD/TOD account, but there are exceptions.
- How do you want to divvy it up? If you create a POD/TOD account and want to split it unequally among beneficiaries, make sure that state law allows that. In Florida, for example, each beneficiary must receive an equal share of the remaining assets.
- What if the beneficiary dies before you do? It's a good idea to name a contingent beneficiary in case something happens to your first choice.
- What types of property can you transfer? A few states, such California, also allow owners to use TOD arrangements to pass some types of personal property, such as cars.
- Does your state have a POD/TOD law? Even without a law, you can probably make use of the accounts by doing business with a broker or bank based in a state that has one on the books. Just bear in mind that brokers are not required to offer TOD accounts. Below is a map showing states that have passed POD and/or TOD laws.
- Would a living trust serve you better? A more sophisticated and flexible option to TOD/POD accounts is to set up a living trust. With it you can name multiple beneficiaries, change them at will, retain complete control of your assets and avoid probate.
- Have you signed a general power of attorney? With it, the agent you named -- or the trustee of your living trust -- generally can write checks and manage your financial affairs if you become unable to do so.