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Understanding Payable-On-Death Accounts

If you’ve heard about payable-on-death accounts before but aren’t quite sure what they are or how they’re useful, keep reading to learn more. It’s important to understand what these financial planning tools are, what they are useful for accomplishing, and how you can incorporate them into your life.

What Is a Payable-On-Death Account?

A payable-on-death account is a bank account that transfers its assets to a designated beneficiary upon the account owner’s death. The transfer is immediate and avoids probate, so there’s no need to list the account among any other property of the decedent’s estate that may be probated.

You might not always see a “payable-on-death account” referred to by this term. Other terms that describe the same financial tool include POD, tentative trust, informal trust, and revocable bank account.

How Does a Payable-On-Death Account Avoid Probate?

A payable-on-death account avoids probate by instructing the bank to hold an account’s assets until the owner’s death. This is why these accounts are sometimes referred to as “informal trusts.”

When you wish to configure a bank account as a payable-on-death account, you must enter into an agreement with the bank, which acts in a capacity analogous to a trustee.

What Are the Pros & Cons of Payable-On-Death Accounts?

Payable-on-death accounts can be more or less beneficial to you depending upon a variety of factors.

A few benefits of a payable-on-death account include the following:

  • Probate Avoidance – As we previously mentioned, these accounts avoid probate. In doing so, it’s possible to transfer a significant amount of wealth in private, without unnecessary delays, without involving the courts, and without incurring court fees.
  • Easy to Create – Compared to a trust, payable-on-death accounts are easier to create. All you really need to do is inform the bank that you wish to name a beneficiary to whom the bank should transfer your account’s assets upon your death. This can involve some paperwork and verification, but you probably won’t need to wait very long or pay anything to establish this agreement.
  • No Monetary Limits – How much you want to put in a payable-on-death account is up to you, and the sky is the limit. There are no restrictions on how much money these accounts can have, which means you can worry a lot less about unforeseen consequences.
  • Multiple Beneficiaries – While you are alive, you can name as many beneficiaries to your payable-on-death account as you need. You can also remove them. When you pass away, the account’s proceeds are evenly distributed among your beneficiaries unless you provide specific instructions for division.

That said, there are some possible drawbacks to consider:

  • You can’t name alternate beneficiaries. This is an important concern if you intend to only have one beneficiary. If the person you name is deceased or otherwise unable to receive the transfer, you can’t name a backup beneficiary to receive it in their place. When no backup beneficiary is named, the account may have to go through probate before the money goes to your heirs.
  • The beneficiary has no rights while you’re alive. Before you pass away, any beneficiaries you name have no right to claim the funds in your payable-on-death account. This may only be an issue if you wish your beneficiaries to receive the funds before your death, as it may cause a delay in the transfer.

You may be able to discern for yourself if this financial tool would be useful to you, but you can also consult with an estate planning attorney like ours at the Law Office of Mitchell A. Port for additional guidance.

Is There FDIC Coverage for Payable-On-Death Accounts?

Yes, there is FDIC coverage for payable-on-death accounts. In fact, having one of these accounts can increase your FDIC-insured coverage limit from the standard $250,000 to $1.25 million.

When it comes to your personal assets, the Federal Deposit Insurance Corporation (FDIC) covers only up to $250,000. This limit applies across all of your savings accounts, checking accounts, money market accounts, and certificates of deposit.

The reason a payable-on-death account can increase your FDIC coverage limit is the beneficiary interest. You can create up to five accounts for each payable-on-death beneficiary. Therefore, it’s possible to protect up to $1.25 million; alternatively, you can deposit $1.25 million into one FDIC-insured account and name up to five separate beneficiaries. Keep in mind that each beneficiary can only have up to $250,000 of an account’s assets insured by the federal government.

Are Payable-On-Death Accounts Subject to Claims from Creditors or Family?

They can be. Under ideal circumstances, the owner of a payable-on-death account passes away without unpaid debts, and the assets in their account transfer to their named beneficiaries. Should the owner have outstanding debts or unpaid taxes, however, the assets in the payable-on-death account may be used to satisfy these financial obligations.

If the owner of a payable-on-death account lives in a community property state (such as California), their spouse has a 50% claim to the account’s assets, regardless of who the beneficiaries are. The exception to this is if the assets and/or account were established before marriage, in which case they may be considered the owner’s separate property to which the spouse has no legal claim through marriage.

How Do Beneficiaries Receive Money?

After the owner of a payable-on-death account dies, the beneficiary can claim the account’s proceeds by showing the bank a certified copy of the owner’s death certificate and verifying their own identity. If the account was a joint account, both owners’ death certificates are needed.

There may be a short period for the actual transfer to go through, but the process is “instant” compared to undergoing weeks or months of probate before collecting funds is possible.

Do You Need Help with a Payable-On-Death Account?

If you need help with any matter involving a payable-on-death account, don’t hesitate to reach out to the Law Office of Mitchell A. Port for assistance. We understand that making plans for the future can be hard, especially when there are so many options available. Our goal is to help our clients make sense of complicated estate planning and probate matters so that they can make the best decisions for themselves.

Want to get in touch? Contact the Law Office of Mitchell A. Port online to learn more.

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