As more and more people focus their estate planning efforts away from estate tax prevention and more towards probate avoidance, payable-on-death accounts have drawn renewed attention. These accounts have specific probate avoidance properties that make them appealing to a lot of people worried about the time and expense associated with the probate process. While you should only choose to use a specific estate planning tool after carefully consulting with an experienced and qualified estate planning lawyer, here is what you should know about payable-on-death accounts and how you can use them as part of your comprehensive estate plan.
Payable-on-Death Accounts and Beneficiaries
A payable-on-death (POD) bank account is somewhat similar to a life insurance policy. With a life insurance policy, you get to name a beneficiary. That beneficiary is legally entitled to receive the policy payout upon your death. The insurance payout will not have to go through probate, but will instead transfer automatically to your chosen beneficiary.
Payable-on-death accounts work in much the same way. When you create a payable-on-death account with your bank or financial institution, you get to name a beneficiary. When you die, that beneficiary will receive any money you have in the account. Unlike other bank accounts that do not name the beneficiary, the person you choose will not have to wait for the property (the account funds) to go through probate before he or she can receive it.
However, a direct payment to a beneficiary may be problematic if the beneficiary is a minor, disabled and receiving public benefits, is financially irresponsible, or has substance abuse problems as well as other problems. Distributions to such beneficiaries through a well-constructed living trust can address these issues.
Probate and Payable-on-Death Accounts
Probate is legal process that applies to property left behind by a deceased person. Every state, including the state of California, has specific rules that apply throughout this process. Because of this, probate can last a long time and can be a significant estate expense. Avoiding probate whenever possible is one of the main reasons people create estate plans.
While you are alive, you can use your payable-on-death account just like you would any other bank account. Your chosen beneficiary does not become a co-owner, nor does he or she receive the right to use account funds during your lifetime.
However, POD accounts may be difficult to access if you become incapacitated. Your death beneficiary has no right to access your money during your lifetime. For this reason, it is often better to title an account in a living trust which does allow lifetime access as well as avoid probate.
While payable-on-death accounts are one way to help your states avoid probate, they are not an ideal solution if you have estate tax concerns. While most people do not have to worry about their estates having to pay estate taxes, those who do should know that using a payable-on-death account will not help you reduce your potential tax burden. There are estate tax mitigation strategies that are available, but using one or more payable-on-death accounts is not an effective way to reduce or eliminate any potential estate tax exposure you might face.