Pay on Death Fail

Not to disparage bank employees, but many of my clients have been told by tellers, managers and other bankers to designate their accounts as “Pay on Death” to their beneficiaries rather than spending the money to create a revocable living trust. While a Pay on Death (“POD”) account will generally avoid the probate process, those accounts are not ideal for those with any degree of net worth. 

PODs may name a single or multiple parties, but a beneficiary is not the same as an account signatory. A beneficiary is the person named as one to whom sums on deposit in an account are payable on request after the death of the account holder. Generally speaking, if the account owner becomes incapacitated, the POD beneficiaries may not access the account funds for the account owner’s benefit.  

In which case, the account owner should have a validly drawn, current durable power of attorney that would specifically enable the agent named in that document to handle pay on death accounts. Absent such a document, the account funds may not be accessed. The family’s choice would then be to head to guardianship court, which takes time and is expensive. 

Further, the financial institution’s responsibility is to pay the account to the beneficiaries upon demand at the account owner’s death. If the account owner has a surviving spouse who would have rights to the account either as someone who contributed amounts to it, or under state law under a spousal elective share interest, then that controversy could very well end up in litigation. 

The account may suffer if one of the owners is sued, then the funds in the account may become subject to a judgment lien. This could wipe out some, or possibly all of the account. 

If the original owner of a POD account adds one child as a beneficiary but has other children that he wants to share in the account, he may unintentionally disinherit the other children. If one of his children predeceases, the account may nevertheless go through that child’s probate. If one of the beneficiaries is a minor, a court ordered process may be necessary for the bank or financial institution to make a distribution of the account until the minor is an adult.   

Upon the account owner’s death, the account cannot be used to settle the decedent’s final affairs, or be used to satisfy ongoing expenses that might be necessary to maintain a home, business or other asset. The account is not available to pay the last taxes of the decedent. 

All of these problems may be alleviated through the use of a revocable trust. When you create a revocable trust and transfer your assets into the trust, you remain in control of your assets. When you become incapacitated, the person or institution that you’ve named to serve as your successor trustee steps in seamlessly to handle your financial affairs. Upon your death, the assets in the trust avoid the probate process.  

I’ve had multiple clients who have already established revocable trusts have their bankers or financial firms instruct them to place their accounts as POD. This is absurd. When a client has already created a revocable trust, POD accounts may do nothing more than bypass the client’s express wishes and serve to complicate his trust administration. 

In one recent case that I’ve handled, my client, unbeknownst to me, created several POD accounts, one for each of her grandchildren. Late in life she became ill. One of her daughters, not realizing that the accounts each named different grandchildren as beneficiaries, drained an account fully to pay for the client’s medical and nursing home care before accessing a different account.  

The result of her actions was to disinherit some of the grandchildren, since their accounts were consumed for their grandmother’s care. The other accounts that weren’t consumed were eventually distributed to the other grandchildren, who chose not to share their inheritance. 

In yet another case, a client named her son as a POD beneficiary. At the time of the client’s death, son was undergoing a divorce. The account sums ended up included in alimony calculations. The frustrating aspect of this case was that the client had a revocable trust that was drafted specifically to protect the son’s inheritance from a divorcing spouse. 

I could go on. I hope that you now realize that for those with even a modest net worth, POD accounts are not the best estate planning vehicle. Instead, talk to a qualified estate planning attorney to establish a proper estate plan. 

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