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“Payable on Death” - What You Need to Know

If you are in the process of planning your estate, it will be helpful to have an understanding of payable on death accounts. Here's what you need to know.

Patrick Hicks

Patrick Hicks, @PatrickHicks

Head of Legal, Trust & Will

Payable on Death (P.O.D.) accounts can be a great option if you want to set up an easy, seamless way for assets in a bank account to transfer to the beneficiary of your choosing after you pass away. Also commonly referred to as a “Totten Trust,” a Payable on Death account can be set up at most financial institutions for checking and savings accounts, Certificates of Deposits (CDs), money markets and savings bonds. They’re generally accepted under state law.

If you’ve been looking for a way to set up your estate to make things easier on your loved ones after your passing, you may want to consider opening or transferring existing bank accounts to be Payable on Death. 

Learn more about how these accounts work, what they actually mean, some benefits and drawbacks, and most importantly, how to set up a Payable on Death account here.

What Does Payable on Death Mean?

Payable on Death (P.O.D.) means exactly what it sounds like. It’s simply a type of account that becomes payable to someone else (the beneficiary you name) upon your passing.

What is a “Payable on Death” Account?

A Payable on Death account is essentially created when you make an agreement with your financial institution. This formal, legal agreement tells your bank who they should hand your money over to after you pass away. The agreement ensures your intentions are documented and known through a Payable on Death form or beneficiary designation form that’s filled out and kept on file with the bank. 

With the form filed, the bank has a legal document clearly stating who you named as beneficiary (who should inherit the money in your account). P.O.D.s typically override a Will or any other financial Estate Planning document (such as a Trust). 

Benefits of P.O.D. Accounts

There are a number of reasons why P.O.D. accounts are advised and can be beneficial.

  • They are simple to open

  • The process to access funds for the beneficiary is easy

  • It’s free to both the account owner who establishes the P.O.D. account, as well as to the eventual beneficiary

  • There is essentially no limit to how much money can be in the account

Drawbacks of P.O.D. Accounts

Of course, as with most things, there are some drawbacks to P.O.D. accounts, too.

  • You can’t name an alternate (contingent) beneficiary, so if the person you named predeceases you, the assets will likely transfer to the estate, and then go through probate anyway

  • P.O.D. accounts may result in issues with paying off taxes, debts and other expenses the estate may owe - this can become particularly complex if the beneficiary differs from the Executor of your estate (who’s charged with paying those debts and administering the estate)

  • If the beneficiary cannot be found or does not want to take ownership of the account, it can become quite complicated to go around the process

Other Common Questions About “Payable on Death” Accounts

Because there are both pros and cons to Payable on Death accounts, it’s wise to try and understand as much as you can about them before you decide to open one.

Does Payable Upon Death Avoid Probate?

In short, yes a P.O.D. account is a good way to bypass the often complex and stressful probate process. This is because when the original account owner passes away, it triggers an automatic new ownership to the named beneficiary. Since the account is retitled immediately upon death, technically it’s not in the original owner’s Will, so it isn’t subject to probate. 

Typically, it’s very easy for a P.O.D. beneficiary to get control of the account. With just an original death certificate, as long as the beneficiary designation form was properly filled out and filed with the bank, your beneficiary should quickly have access to any remaining money in the account.

For more information on probate and how to avoid it, check out our in-depth article What is Probate and How to Avoid It

Are Payable on Death Accounts Taxable?

Taxes always seem to be a bit confusing, but there are a few key things to note regarding P.O.D. accounts specifically. 

  • First, the beneficiary named on a P.O.D. account is usually not subject to any taxes at the federal level

  • But the amount in the account at the time of the owner’s passing might be taxable to his or her estate. 

  • Finally, depending on which state the beneficiary lives in, there may be a tax consequence in the form of an inheritance tax.

Transfer on Death vs Payable on Death - What’s the Difference? 

Payable on Death and Transfer on Death (T.O.D.) accounts are similar in their intention and purpose. Both are set up to simplify the process of getting assets to a beneficiary after the original account owner passes away. 

The difference is that T.O.D. accounts refer to stocks, bonds or brokerage accounts, whereas P.O.D. accounts are bank assets.

Payable on Death vs Beneficiary - What’s the Difference? 

Again, just like T.O.D. accounts, Payable on Death accounts are set up to ensure a beneficiary receives money from an account quickly and easily. While P.O.D. accounts do have beneficiaries, the term “beneficiary” itself is also commonly used for different account-types and assets.

Usually, retirement accounts like 401(k)s or IRAs, as well as life insurance policies and annuities would have named “beneficiaries.” P.O.D. accounts are opened on bank assets (like money markets, savings and checking accounts and CDs).

In Trust For vs Payable on Death - What’s the Difference? 

In Trust For (ITF) accounts vs Payable on Death accounts can be easily understood if you think about them like this: an ITF account has a Trustee, whereas a P.O.D. account has a named beneficiary.

With an ITF, the original account owner and the Trustee both technically own the funds in the account, even while you’re still living. By contrast, the beneficiary of a P.O.D. doesn't have any rights to your account until you pass away.

How to Set up a Payable on Death Account

Setting up a Payable on Death account is very simple. Doing so takes just a matter of minutes, and can be an easy way for you to ensure your loved ones avoid probate. And of course, the main benefit, as we’ve discussed, is you make it seamless for someone to inherit your account, virtually giving them immediate access to some or all of the money you hold in basic bank accounts. 

To open or set up an existing bank account as ”Payable on Death,” simply follow the steps below:

  1. Before you do anything else, you need to decide who you want to be the P.O.D. beneficiary.

  2. You’ll need a bit of information about them, including: their full legal name, home address and birthdate.

  3. Whether you’re opening a new account, or if you’re transferring an existing one to be a P.O.D account, you must go to the bank in person.

  4. Ask the bank or financial institution for their specific P.O.D. designation form; fill it out.

  5. List the beneficiary you want to name on a signature card the bank provides you with, and title them as P.O.D. payee.

  6. Be sure the bank files your form for the future.

While some people try to do this process on their own by using a makeshift form or by putting direction in their Will, using an official Payable on Death form that’s bank-specific is really the only way to ensure you avoid any potential complications for your beneficiary. 

The whole point of Estate Planning is to make things easier on your loved ones after you pass away. Setting up a P.O.D. account is one way to accomplish that goal. And though you may not want to be thinking about that inevitable time, you might just find it gives you incredible peace of mind knowing that you’ve taken one small step towards easing any extra burden on your loved ones by creating a P.O.D. account.

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