Both Payable on Death (POD) and Transfer on Death (TOD) are designation instructions that you add to registrations on financial accounts or property records to help avoid probate. These designations are merely a set of directions to immediately transfer assets triggered by the owner's death. It is essential to note that using these designations moves assets more quickly than a will. However, consult your legal professional before deciding on POD or TOD titling and how it may impact your will or estate plan.
You must understand how using designation tools such as POD and TOD impact your household's assets if you die. Here we will explain what each designation is and when to use it:
Payable on Death (POD) is an arrangement between a bank or credit union and a client designating beneficiaries to receive assets from their checking and savings accounts, CDs, savings bonds, or other deposit accounts immediately when they die. When listing a beneficiary on the account titling, the account becomes a POD account. Here are other things to know about POD:
- POD accounts are used by people who want to keep their money out of probate
- The account owner uses a form called a Totten trust that gives the bank authorization to convert the account to a POD.
- Beneficiaries of a POD account have no right to the assets until the owner dies.
- Beneficiaries can be individuals or business entities.
- Upon death, the beneficiaries become the owners of the account.
- PODs are designations used at banks and credit unions.
- A POD account may become subject to claims by the government and creditors.
Transfer on Death (TOD) is an arrangement between a financial institution and an individual which impacts assets such as your 401(k), IRA, and other securities. TOD lets beneficiaries receive assets without going through probate by enabling the security owner to specify the percentage of assets each beneficiary will receive, which helps the estate executor distribute the owner's assets after death. What else is essential to know about TOD?
- Transfer on death applies to certain assets such as stocks, bonds, or brokerage accounts with named beneficiaries.
- To initiate a TOD, the brokerage firm or asset's custodian must receive the appropriate documents to verify the assets can be transferred (death certificate, court appointee letter, etc.).
- The beneficiaries have no right to the assets until the owner dies.
- Beneficiaries can be individuals or business entities.
State laws dictate who receives the assets if the owner has designated POD or TOD to beneficiaries and is married, but the spouse is not listed as a beneficiary. For this reason, having a clear understanding of the laws in your state by working with a legal professional and financial professional is vital so that these assets transfer as you intend.
In an ideal world, everything that transfers by legal title can benefit from POD or TOD designations, saving time by avoiding probate. When no beneficiaries are listed, banks and financial institutions must rely on probate to determine who has legal rights to these assets regardless if a will exists or not.
Probate takes time, costs money, and is avoidable. For this reason, you must work with your financial and legal professionals to determine if you want your accounts titled POD and TOD and whom you wish to designate as your beneficiaries.
.
.
.
Sources:
https://www.investopedia.com/terms/p/payableondeath.asp
https://www.investopedia.com/terms/t/transferondeath.asp
https://www.kiplinger.com/article/investing/t021-c000-s001-avoid-probate-with-pay-on-death-accounts.html
Important Disclosures
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
This information is not intended to be a substitute for individualized legal advice. Please consult your legal advisor regarding your specific situation.
This article was prepared by Fresh Finance.
LPL Tracking #1-05237012