Adding a payable-on-death (POD) or transfer-on-death (TOD) designation to an account allows the assets (money and property) in that account to be passed to a named beneficiary when the original account holder passes. They are also fast, easy, and usually free to set up. However, they do not provide the full range of benefits that a traditional trust does and can have some unintended consequences.

Before deciding whether to set up a POD or TOD account, it is important to know the difference between them, understand their pros and cons, and talk to an attorney about how they fit into your estate planning goals.

POD versus TOD (versus a Trust)

A way to avoid probate is to use POD and TOD accounts for asset transfers. The major difference between POD and TOD accounts is the type of assets held in the account.

• POD is a designation added to a bank account, such as a checking account, savings account, certificate of deposit (CD), and money market account.
• TOD applies to an investment account, such as an individual retirement account, 401(k), brokerage account, and other accounts holding securities.

An additional difference between POD and TOD accounts is that, with a POD designation, the account assets are transferred to a beneficiary (or beneficiaries), while with a TOD designation, account ownership transfers to a beneficiary.

PODs and TODs are able to be revoked during the owner’s lifetime. With both, while the owner is alive, they retain account ownership and can manage the account as they see fit. Assets transferred in this way have no protection from a beneficiary’s creditors.

Pros and Cons of PODs and TODs

Other benefits may include the following:

• Setup is straightforward and there is generally no cost.
• Designated beneficiaries receive the funds without having to wait for probate to conclude, which can take months.
• The account owner has the flexibility to change, add, or revoke a beneficiary designation.
• Trusts can also be named POD beneficiaries.

The probate avoidance offered by a POD or TOD account is its main appeal, but this and other benefits should be weighed against the following potential pitfalls:

• A POD or TOD account is not effective if the owner becomes incapacitated.
• Backup beneficiaries cannot be named, so if a beneficiary predeceases the account owner, their share of the account could be automatically reallocated to the remaining surviving beneficiaries or subject to probate.
• If a will is updated but POD or TOD beneficiaries are not, there could be inconsistencies in the overall estate plan.

Is a POD or TOD Account Right for My Estate Plan?

An estate plan is a highly individual matter that reflects your personal wishes and family dynamics. As such, there is no “one size fits all” advice for an estate plan. The pros and cons of any estate planning vehicle—be it a POD, TOD, revocable trust, will, or power of attorney—must be weighed against your values and goals.

During a meeting with our estate planning attorneys, we can discuss POD and TOD accounts and how they may align with your overarching estate planning objectives. Call or contact us to start planning today.