The difference between a will and a “payable on death” account (and when to use them)
When you die, sorting out your estate can take more than a year. For this reason, you may want to consider converting some of your bank accounts to “payable on death” (POD) accounts, which will give your heirs quick access to these funds. PODs shouldn’t necessarily replace the full estate planning you get with a will, but there are scenarios where PODs could make sense.
What is a “payable on death” account?
Most types of cash accounts (savings, checks, CDs) allow you to designate a beneficiary in the event of death, although you must request this first. There is also something called “transfer on death” accounts, which is the same idea but applies to assets like property or stocks (for this article we will only focus on accounts payable on death).
The advantage of these accounts is that you would inherit the money (relatively) quickly, without going through the tedious process of executing your will, known as probate, which may take more than a year. This can be handy, especially if your beneficiaries need the money immediately, perhaps to cover your funeral expenses.
All you have to do is notify the bank of your intention to designate a beneficiary, and the bank will give you a free form to fill out (sometimes called a “Totten trust” form). Once approved, the designated beneficiary is not entitled to any of your money while you are still alive (even if you are incapacitated). In the event of death, the beneficiary will still need identification and a copy of your death certificate to switch the account, a process that can take anywhere from a few days to a few weeks.
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Why the payment on death does not replace a will
PODs can be a good way to quickly transfer money to a beneficiary, but they have some drawbacks that make them less flexible than traditional estate planning:
- PODs don’t have the special protections of a will’s assets, which means you would be more vulnerable to lawsuits and creditors claiming your funds.
- While you can request more than one beneficiary for a POD, there are often limits on how this is divided. Personalized backup instructions based on different scenarios are also not possible (such as when a beneficiary dies before you).
- There is no control over How? ‘Or’ What the money is spent. Estate planning, on the other hand, gives you more options and contingencies as to how funds are distributed. This type of flexibility is useful when children are the beneficiaries.
When does paying to death accounts make sense?
As this Forbes column suggests, a POD makes sense if there is an immediate need for cash within your family. PAOD can work well when you have a simple estate to liquidate, such as when you only have one beneficiary already scheduled to inherit most of your estate. (This is why some people set up dedicated PODs for certified deposits or checking accounts, but keep the rest of their estate in a traditional will).
Whatever you choose to do, consider talking to a financial advisor first. There are lots of nuances to the legacy that might not be addressed by PODs, especially if you have many beneficiaries and a wide range of investments.
