The Top 5 Pros and Cons of Using a POD Account in Your Estate Plan

In estate planning, many clients are looking for the “easy button”—a simple, free way to pass assets to their loved ones without the cost and hassle of probate. This search often leads them to a tool known as the “Payable-on-Death” (POD) or “Transfer on Death” (TOD) designation. It may seem like the perfect solution, and it often is. You sign a simple form, name a beneficiary for your account upon your death, and it avoids probate.

However, it is important to understand the Pros and Cons of such designations. As is often the case in life, the best and worst feature of a POD designation is the same: Simplicity. This can be great if your situation is indeed simple. However, this can also be problematic if you are trying to use a simple tool, when your desires are not actually simple. If used unwisely or incorrectly, a POD designation can create undesirable and unintended consequences. POD and TOD are blunt instruments that are not intended for complication, nuances, rules, terms, or conditions – they are simply a beneficiary designation – “Person A gets this account when I die, no restrictions”.

Before you rely on a bank or financial institution to carry out your wishes, it is critical to understand what a POD designation can do, and what it cannot do.. At Piatchek Law Firm, we believe you should make an informed decision, knowing the benefits and risks.

What are Payable on Death (P.O.D) and Transfer on Death (T.O.D) Designations?

POD and TOD designations are simply beneficiary designations for your financial or banking account(s). You simply name a beneficiary by filling out a form (paper or online) at your bank, and when you die, the named beneficiary or beneficiaries receive your account. Generally, you cannot put terms or conditions on this gift (such as when it will be received or how it will be used), and you cannot put “someone in charge” to hold the money for someone else. All you can do is simply name a beneficiary, who will receive the money upon your death.

What is the Difference between a Payable on Death (P.O.D) andTransfer on Death (T.O.D) Designation?

There is essentially no difference. Some banks or financial institutions may use the terms POD and TOD interchangeably. Technically, “Payable” refers to money, while “Transfer” refers to personal property. For example, a beneficiary designation on a bank account is usually referred to as “Payable on Death”, whereas a beneficiary designation on a vehicle is generally referred to as “Transfer on Death” – because a vehicle cannot be “paid” (it is not money, but a thing), but it can be “transferred” upon the death of the owner.

However, some companies may use these terms differently, or interchangeably. For example, some investment companies may call the beneficiary designation a “TOD”, even though they are dealing in money. When stocks and investments become involved, the line can become blurry as to whether we are talking about stocks, investments, bonds, or cash etc., and the company may simple call all beneficiary designations a “Transfer on Death” designation.

Therefore, please consider the terms POD designation, TOD designation, and beneficiary designations to be interchangeable and essentially be the same thing.

The “Pros”: Why POD Accounts Are Convenient, Simple, and Useful

It’s easy to understand the appeal of a POD account. The benefits are immediate, clear, and require very little effort.

• Pro #1: POD and TOD Designations Avoid Probate (for that single account).
  This is the primary selling point. The money in that specific account passes directly to the named beneficiary, bypassing the public, costly, and time-consuming Missouri probate court process.
• Pro #2: These Beneficiary Designations are Simple and Free.
  This is not a complex legal document. It’s a one-page form provided by your bank at no cost. The simplicity is one of its greatest features.
• Pro #3: You Retain 100% Control During Your Lifetime.
  Unlike adding a child as a joint owner (which is a separate and can be highly risky action), a POD beneficiary has no rights to the money while you are alive. You can spend it all, close the account, or change the beneficiary at any time.
• Pro #4: The Payout is Usually Fast.
  Your beneficiary typically only needs to present your death certificate and their ID to the bank to access the funds, often within days. There are exceptions to this rule, as some banks and financial institutions are quicker than others. Sometimes it can take awhile when dealing with big, national banks or financial companies. Either way, it should be significantly faster than waiting for a Will to be probated.
• Pro #5: They Are Flexible (to a Point).
  You can usually name multiple beneficiaries on a single account. However,at some institutions, you can only name your beneficiaries to receive equal shares. Alternatively, some banks or institutions may allow you to specify uneven percentages for your beneficiaries, or even specify alternate beneficiaries.

Based on this list, a POD account may seem like an ideal solution. However, these benefits are precisely where the danger lies. Simplicity is not only the greatest feature, but also is its greatest weakness, as it fails to account for life’s inevitable complexities.

The “Cons”: 5 Limitations or Drawbacks of POD and TOD Designations

The following list or drawbacks are often not explained by the bank teller or customer services representative. Relying on POD designations without legal counsel, or without a strong understanding of what such designations can or can’t do, is one of the most common mistakes we see, and the damage is often permanent.

• Con #1: A POD / TOD Designation Overrides Your Will or Trust
  A POD or TOD designation is essentially a legal contract with your bank or financial institution that supersedes your Last Will and Testament.

For example, let’s say your Will or Trust states your estate is to be divided 50/50 between your two children, but you made your savings account POD to only one of your children. This means that ONLY THAT ONE CHILD whom you designated will receive the account upon your death. The child who receives it will own it alone, outright, with absolutely no legal obligation to share it with their sibling, or anyone else. Your Will or Trust has no power to stop this. If you did not do this on purpose, then you have just accidentally disinherited your other child.

• Con #2: POD and TOD Designations Often Have No Contingency (Backup) Plan.
  What if your named beneficiary passes away before you do? Most simple bank forms do not allow for complex “backup” designations (such as “per stirpes” in a Will or Trust), and many do not let you name an alternate beneficiary at all.. If your beneficiary dies, and you forget to go back to the bank and name a new beneficiary before you pass, that POD designation is void. The account will go back into your estate and be forced through probate—the very thing you tried to avoid.
• Con #3: It Offers Little to No Protection for Your Beneficiaries.
  A POD account usually pays out in a single lump sum, without restriction, with no terms or conditions, without anyone else in charge, . This could be a major problem if this was not your intent, or if your beneficiary is not legally or realistically capable of managing their own money:
  • If your beneficiary is a minor, a court-supervised conservatorship will be required to manage the money.
  • If your beneficiary has special needs, a direct inheritance can instantly disqualify them from essential government benefits like SSI and Medicaid, forfeiting their long-term care.
  • If your beneficiary is not good with money, is in a lawsuit, or is getting divorced, that inheritance could be exposed to their creditors, lawsuits, or an ex-spouse, if not properly handled. A properly drafted trust, by contrast, can protect these assets for your beneficiary’s use, by protecting a beneficiary from themself through use of age restrictions or structured gifts being paid in installments over time.
• Con #4: It Provides Zero Incapacity Protection.
  A POD designation only works after you die. If you have a stroke or develop dementia and become incapacitated, such a designation does not do much to help with such a situation. Your family still cannot access that account to pay for your medical bills without a separate Durable Power of Attorney or a costly, public guardianship proceeding. For this reason, and many others, we always recommend our clients to consider making a Financial Power of Attorney a part of their estate plan.
• Con #5: It Creates Unintentional, Unequal Inheritances.
  We see this scenario constantly. A parent makes various accounts, vehicles, or property POD / TOD to various children, and the children all get unequal inheritances.

For example, consider a parent who wants to “be fair” by making a $50,000 checking account POD to Child A, and a $50,000 savings account POD to Child B. But over the next 10 years, they spend down the checking account for living expenses. At their death, Child A gets $1,000 and Child B gets $50,000. They have unintentionally created a conflict between the children, who do not feel treated equally. This is just one simple example, but we see this play out many different ways with investment accounts, cars, bank accounts, real estate, and various other assets of inevitably unequal values.

A POD Account is a Simple, Useful Tool, But Not a Comprehensive Plan

A bank form cannot address critical “what if” questions. It cannot plan for contingencies, protect your heirs from their creditors, divorce, incarcerations, or future creditors, or manage your assets if you become incapacitated.

This is the crucial difference between a product and a plan. A POD account is a simple product. A comprehensive estate plan, often built around a Revocable Living Trust, is a plan designed by an attorney to handle all of these contingencies. A trust can name backup beneficiaries, can protect assets for minors or those with special needs, can plan around divorce or bankruptcy, and can provide for you during incapacity, all while avoiding probate.

Should You Use a POD Account in Your Missouri Estate Plan?

For many, a POD account can be a small, useful part of a larger, attorney-drafted plan. A POD or TOD destination is not a replacement for an estate plan, Will, Trust, or Power of Attorney. For most, relying on it as your only plan is one of the most common and costly estate planning mistakes.

Don’t let a simple bank form derail your family’s future. The attorneys at Piatchek Law Firm in Springfield, MO, can review your existing designations and help you build a coordinated plan that ensures your entire estate is protected and your wishes are actually carried out. If you have found this article helpful, we would appreciate you contacting us for a consultation today.

If you have questions about this issue, a estate planning attorney in Springfield, MO can help you understand the legal risks and the best path forward.