By: Randall A. Denha, J.D., LL.M.*
Many banks encourage the use of payable on death (“POD”) accounts, in part because such accounts do not have to go through the estate administration process. If someone in a bank asks who should receive a bank account at your death, that bank account is more likely than not going to be a POD account, whether you know it or not. The advantages of a POD account are clear – the funds or investments in the account go directly to the named beneficiary without having to be handled by the executor. However, a POD account does not save any taxes, as the owner of the POD account remains the owner until he or she dies.
On the con side, quite often a POD account creates more problems than it solves. A POD account is a very inflexible estate planning device. For example, if someone names her three children as the beneficiaries of a POD account, and one child predeceases the account owner, the predeceased child’s children will not inherit the predeceased child’s share of the account, as would normally be the case if the account had passed pursuant to a trust. POD accounts can cause problems for the executor, who may be surprised to find no cash in the estate to pay estate expenses and taxes, with the executor then having to go to those who received the POD accounts and ask for money back to pay estate bills (and good luck with that!). There are ways to recover funds diverted from an estate through the POD designation, but without the cooperation of the account beneficiaries it is an expensive legal process.
There is also the situation where just one child is designated as the POD beneficiary. This might happen when someone says to a bank “I want to put X child on the account,” thinking that will give X the right to sign checks on behalf of the account owner. At the account owner’s death, X gets the entire balance in the account, often much to the surprise of X’s siblings. Sometimes X and his or her siblings are willing to rearrange estate distributions to account for the transfer of funds due to the POD designation, but frequently siblings are not willing to make this accommodation, thus aggravating family disharmony at a difficult time. Any transfers by X to his siblings will be considered taxable gifts and a tax return may have to be filed with the IRS.
If you have POD accounts, make sure that you tell your estate planning attorney, so they can be factored into your overall estate planning. Otherwise, the best-laid plans may go astray!
*RANDALL A. DENHA, J.D,, LL.M., principal and founder of the law firm of Denha & Associates, PLLC with offices in Birmingham, MI and West Bloomfield, MI. Mr. Denha continues to be recognized as a “Super Lawyer” by Michigan Super Lawyers in the areas of Trusts and Estates; a “Top Lawyer” by D Business Magazine in the areas of Estate Planning; a Five Star Wealth Planning Professional and a New York Times Top Attorney in Michigan. Mr. Denha can be reached at 248-265-4100 or by email at firstname.lastname@example.org