One of the most common questions I receive from clients is whether there is a simple way to pass assets to loved ones without going through probate. Fortunately, many assets can be transferred directly to beneficiaries through either a Transfer on Death (TOD) designation or a Payable on Death (POD) designation.
While both methods are effective probate-avoidance tools, they apply to different types of assets, and each has advantages and disadvantages that should be understood before relying upon them as part of an estate plan.
What Is Probate?
Probate is the court-supervised process of administering a deceased person’s estate. Depending upon the size and complexity of the estate, probate can involve court filings, notices to creditors, administrative expenses, and delays before beneficiaries receive assets.
Many individuals prefer to avoid probate whenever possible, and TOD and POD designations are among the simplest methods available.
What Is a Payable on Death (POD) Account?
A Payable on Death account is most commonly used for bank accounts, savings accounts, certificates of deposit (CDs), and credit union accounts.
The owner maintains complete control of the account during life. Upon death, the funds pass directly to the named beneficiary without becoming part of the probate estate.
Advantages of POD Accounts
- Simple and inexpensive to establish.
- Owner retains complete control during life.
- Beneficiary has no ownership rights while the owner is alive.
- Funds pass quickly upon death.
- Avoids probate administration.
Disadvantages of POD Accounts
- No asset management if the beneficiary is a minor or disabled.
- No protection from a beneficiary’s creditors, lawsuits, or divorce.
- Beneficiaries must survive the owner; otherwise, additional planning may be necessary.
- Can unintentionally disrupt an overall estate plan if beneficiary designations are not coordinated.
What Is a Transfer on Death (TOD) Designation?
A Transfer on Death designation is similar to a POD designation but generally applies to investment assets such as brokerage accounts, stocks, bonds, and securities.
Like a POD account, the owner retains full control during life and may change beneficiaries at any time. Upon death, ownership transfers directly to the named beneficiary without probate.
Advantages of TOD Designations
- Avoid probate.
- Maintain complete owner control during life.
- Easy to establish through a brokerage firm.
- Typically involve little or no cost.
- Beneficiaries often receive assets more quickly than through probate.
Disadvantages of TOD Designations
- No ongoing management or protection after death.
- Beneficiary may receive a large sum outright regardless of age or financial maturity.
- No protection from creditors or divorcing spouses.
- May create unequal distributions among heirs if not coordinated with the overall estate plan.
Important Tax Considerations
One significant advantage of both POD and TOD arrangements is that beneficiaries generally receive assets directly at death without triggering probate.
In many cases, inherited assets may also receive a “step-up” in income tax basis upon the owner’s death. This can significantly reduce future capital gains taxes if the asset is later sold.
Are POD and TOD Designations Enough?
For many individuals with modest estates and straightforward family situations, POD and TOD designations may provide an effective and inexpensive probate-avoidance strategy.
However, they are not a substitute for comprehensive estate planning where there are concerns involving:
- Minor children.
- Special needs beneficiaries.
- Blended families.
- Asset protection.
- Creditor concerns.
- Tax planning.
- Long-term care planning.
In those situations, a properly drafted trust may offer greater flexibility and protection.
The Bottom Line
Transfer on Death and Payable on Death designations are valuable estate-planning tools that can help families avoid probate and transfer assets quickly and efficiently. They are simple to establish, inexpensive, and effective for many individuals.
However, because they transfer assets outright to beneficiaries and provide little protection after death, they should be carefully coordinated with a comprehensive estate plan.
Planning now can eliminate heartache and disappointment later.
Be Educated! Be Proactive!
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