The Difference Between a Will and ‘Payable on Death’ Account (and When to Use Them)

The Difference Between a Will and ‘Payable on Death’ Account (and When to Use Them)
Photo: KorArkaR, Shutterstock

When you die, sorting out your estate can take over a year. For that reason, you might want to consider converting some of your bank accounts to “payable on death” (POD) accounts, which give your heirs quick access to those funds. PODs shouldn’t necessarily replace the comprehensive estate planning that you get with a will, but there are scenarios in which PODs might make sense.

What is a “payable on death” account?

Most types of cash accounts — savings, checking, CDs — let you name a beneficiary in the case of your death, although you have to request it first. There’s also something called “transfer on death” accounts, which is the same idea but applies to assets like property or stocks (for this post, we’ll just focus on payable on death accounts).

The advantage to these accounts is that you would inherit the money (relatively) quickly, without going through the drawn-out process of executing your will, known as probate, which can take over a year. This can be handy especially if your beneficiaries need cash right away, perhaps to cover your funeral expenses.

All you have to do is to notify the bank of your intentions to name a beneficiary, and at no cost the bank will give you a form to fill out (sometimes it’s called a “Totten trust” form). Once approved, the named beneficiary is not entitled to any of your money while you’re still alive (even if you’re incapacitated). In the event of your death, the beneficiary will still need ID and a copy of your death certificate to switch the account over — a process that might range from a few days to a couple weeks.

Why payable on death is not a replacement for a will

PODs can be a good way to transfer money over to a beneficiary in a hurry, but they do have some drawbacks that make them less flexible than traditional estate planning:

  • PODs don’t have the special asset protections of a will, which means you’d be more vulnerable to lawsuits and creditors claiming your funds.
  • While you can claim more than one beneficiary for a POD, there are often limits on how that’s split. Customised back-up instructions based on different scenarios is also not possible (like when a beneficiary dies before you).
  • There are no controls on how the money is spent. Estate planning, in contrast, gives you more options and contingencies for how funds are distributed. This kind of flexibility is useful when children are the beneficiaries.

When do payable on death accounts make sense?

As this Forbes column suggests, a POD makes sense if there’s an immediate need for cash within your family. A POD can work well when you have an uncomplicated estate to unwind, like when you only have one beneficiary already slated to inherit the bulk of your estate. (This is why some people set up dedicated PODs for certified deposit or checking accounts, but keep the rest of their estate in traditional will and testament).

Whatever you choose to do, consider talking to a financial advisor first. There are a lot of nuances to inheritance that might not be addressed by PODs, especially if you have many beneficiaries and a wide array of investments.

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