Florida Elder Law & Estate Planning Blog


Payable On Death Accounts: Important Issues To Consider

March 15, 2021
payable on death account

Wouldn’t it be nice to know that your loved ones will get their inheritance from you without the hassles and delay of Florida probate? Most people would – and that’s why probate avoidance is a key element of so many Florida residents’ estate plans.

The Problem With Probate

Probate is the court-supervised process that transfers the probatable assets in your estate to your heirs. Probatable assets are any assets owned solely by you and that have no designated beneficiaries or co-owners.

Florida Probate can be time consuming, leaving your heirs hanging for months or even years before they get their inheritance, depending on the complexity and extent of your assets. The administrative and legal fees associated with probate can add up, too, draining your estate of funds you would prefer end up with your loved ones. And if you and your family value privacy, you will definitely want to avoid probate: it is a public process. Little wonder many Floridians seek methods to get their assets directly and quickly into the hands of their loved ones, without involvement of the probate court!

One common probate avoidance route is the Payable on Death account, or POD account (sometimes referred to as the Transfer on Death, or TOD account). In this post, we discuss how POD accounts work and present both their positives and their pitfalls.

POD Accounts: The Positives

A Payable on Death account is extraordinarily simple to establish. It can be used with bank accounts, brokerage accounts, certificates of deposit and many other types of assets. You simply fill out a form naming the beneficiary you wish to get the asset when you pass away, and that’s it – you’re done. You may name more than one beneficiary, and you can change your beneficiary designations anytime you wish.

The beneficiaries have no control over the account while you are alive. Therefore, the funds are not vulnerable to your beneficiary’s creditors (although while you are alive they are vulnerable to your creditors).

You are the owner of the account during your lifetime. When you pass away, your beneficiary provides the financial institution with a certified death certificate, along with documentation proving he/she is the named beneficiary. The funds are then distributed to the beneficiary.

POD Accounts: The Pitfalls

As estate planning attorneys, we help clients identify and plan for all the future “what ifs.” As simple as Payable on Death accounts appear, several “what-if” scenarios can arise that that will create negative consequences. Let’s drill down and look at these pitfalls.

Per Stirpes Designations

If you are like most people, you want to name one or more of your children as beneficiary of your POD account. You probably also want your child’s share to go to his children, should your child pre-decease you. This is known as a “per stirpes” distribution. Unfortunately, many financial institutions do not permit per stirpes beneficiary designations on POD accounts. They do not want the liability that comes with identifying and verifying a deceased beneficiary’s children.

If one of your beneficiaries is deceased when you pass on and your financial institution does not allow per stirpes designations, the institution may simply distribute the deceased beneficiary’s share among the living co-beneficiaries. But if only one beneficiary was named to begin with or if there are no other living co-beneficiaries when you pass away, the money will go into your estate and on to probate – which is precisely what you wanted to avoid when you set up your Payable on Death Account.

The Spendthrift Beneficiary

The beneficiary of your POD account will get a lump sum when you pass on, no strings attached. You have no say as to how he/she uses the money once it is in his hands. If you know your beneficiary is mature and fiscally responsible, this won’t concern you. On the other hand, if your beneficiary has a track record of poor money management or is inexperienced with money management, the inheritance could end up squandered, which is surely not what you envisioned.

Creditors

Once the beneficiary of your POD Account receives the funds, it becomes fair game for the beneficiary’s creditors. For example, if he is sued as a result of an auto accident, is involved in a divorce, or has other debts, the inheritance you have left him becomes vulnerable to his creditors.

If The Beneficiary Is A Minor

If when you pass away the beneficiary of your POD account is still a minor, the financial institution will not release the funds to him. Instead, a guardianship may have to be established. When the beneficiary achieves the age of 18, the money will be released to the beneficiary in a lump sum, and that is another potential pitfall: Someone at age 18, although of legal majority, may be far too immature to handle a lump sum responsibly.

Who Will Pay Estate Expenses, and the Potential For Family Conflict

Your estate will have expenses, including a final income tax return, funeral expenses, medical debts, and estate tax if your estate is large enough. If you owned a home, it will have to be maintained until it is sold, and it could take time to sell.

The question thus arises: If you have passed on money to multiple beneficiaries via your POD account, will all the beneficiaries be willing to give back the funds they received in order to pay estate expenses? Suppose one of your children has already spent all the money he received, before the bills come due? Suppose one of your children has been your main caregiver as you aged, and now feels that the other children, not him, should be the ones giving back money to pay the bills. Suppose one beneficiary is in dire financial straits and another is doing well financially – will the former feel resentful that he has the same burden as his more financially successful sibling? These situations can spark conflict among your children when you pass away. For most parents, that’s a prospect even more unappealing than knowing their kids will have to deal with the probate court.

If after weighing the pros and cons of POD accounts you feel it is a suitable estate planning vehicle for you and your family, you should still closely monitor the account. Beneficiary designations should be reviewed regularly, and changes made promptly when needed. We see many cases in which a person’s good intentions end up foiled because the original owner of a POD account has failed to update beneficiaries when changes such as death, divorce or disability occur.

 

The Solution: A Living Trust

If you are concerned about the downsides of a POD account, a revocable living trust can be a better solution. Properly set up and properly funded, the trust can keep your estate out of probate and avoid the above-mentioned complications that a POD account presents:

Per Stirpes Designations

You can make per stirpes designations, ensuring that when you pass on, a deceased beneficiary’s funds will pass to to his/her children.

The Spendthrift Beneficiary

Unlike a POD account, a Living Trust allows you to set controls on how much money is released to your beneficiary, and when.

Creditors

Language may be included in the trust that protects the funds from creditors. That includes protecting the beneficiary’s inheritance from the spouse in the event of divorce.

If The Beneficiary is a Minor

You can have the money held in trust for a minor child and you may set the ground rules for when the money is released.

Who Will Pay Estate Expenses

Your trustee will have a pot of money from which to pay final expenses. The trustee will not have to ask beneficiaries to return money in order to pay the expenses.

 

To set up your Living Trust, discuss probate or POD accounts, consult an experienced estate planning attorney. Reach out to The Karp Law Firm at 561-625-1100.