If you’re beginning the process of estate planning, there are a wide range of tools that are available to you. Payable on death accounts and transfer on death accounts are two designations that can be used to transfer assets to your loved ones after your passing and bypass the probate process. While these vehicles are similar, the difference between a transfer on death account vs. a payable on death account is the type of assets to which they apply.
What is a Transfer on Death Account?
A transfer on death account is a mechanism that can be used to establish a beneficiary for certain investment assets without going through probate — which can be a lengthy process. Rather, the beneficiary would be entitled to collect the assets immediately and avoid the legal hurdles that can come with a will. A TOD can allow the owner to have full control of the account during their lifetime. The owner may also change the designated beneficiaries at any point and withdraw funds while they are still living.
Transfer on death accounts (TOD) are primarily used for the following investment-related assets, including:
- Stocks
- Mutual funds
- Brokerage accounts
- Exchange-traded funds
Notably, the ownership of real estate can be transferred upon death with a “death designation affidavit.” Not to be confused with the TOD designation used for financial accounts, the death designation affidavit is a legal document that applies specifically to real estate transfers.
What is a Payable on Death Account?
A payable on death account (POD) is a tool used to pass the funds in a bank account to the designated beneficiary upon the owner’s passing. Also referred to as a Totten trust, a POD allows the assets in a bank account to pass directly to the beneficiary without going through probate. While both designations bypass probate, the primary difference between transfer on death accounts vs. payable on death accounts is that PODs can only be applied to bank-related assets.
Specifically, payable on death accounts are typically used for the following:
- Checking accounts
- Savings accounts
- Certificates of deposit
- Savings bonds
- Securities deposits
Setting up a POD is a straightforward process. It simply involves filling out a form with the financial institution that designates the beneficiary.
What are the Benefits of Using a Transfer on Death Account vs. a Payable on Death Account?
If you are wondering whether you should use a transfer on death account vs. a payable on death account, there are advantages to each. In fact, your estate plan can include both planning vehicles depending upon what assets you own. Some of the benefits of using PODs and TODs include:
- Simplicity — PODs and TODs are easy to establish and update at any time. They are also easy to administer upon the owner’s death.
- Flexibility — A POD or TOD is flexible and can be changed at any time during the owner’s lifetime.
- Privacy — Since PODs and TODs do not go through the public probate process, they can help ensure your financial affairs and the beneficiaries you choose are confidential.
- Efficiency — The beneficiary of a POD or TOD gains immediate access to the funds in the account. This is in contrast with assets that pass through a will, which must go through the probate process.
- Cost-effectiveness — The account owner will typically not incur any costs to set up a POD or TOD. These tools can also help the beneficiaries avoid the legal fees and court costs associated with probate.
A skillful estate planning attorney can best advise whether this planning tool is right for your situation, based on your family and financial circumstances.
Are There Disadvantages to Using a Transfer on Death Account or Payable on Death Account?
While there are a number of advantages that come with using PODs and TODs in your estate plan, it’s essential to understand that there can be some unintended consequences. For instance, since the beneficiary cannot access the funds until the account owner’s death, they would not be able to use them to care for the owner in the event of incapacity. A trust or durable financial power of attorney can be used to avoid this problem.
Notably, once an account owner is incapacitated, they can no longer make changes to the beneficiary. In such cases, if the beneficiary passes away before the owner and no contingent beneficiary is named, then the assets in the POD or TOD account would be subject to probate.
Issues can also arise if the designated beneficiary is receiving governmental assistance or Medicaid — receiving the balance of a TOD or POD account could potentially jeopardize these benefits. Additionally, there can be tax implications for the designated beneficiaries on these accounts. Although these accounts avoid probate, they don’t avoid taxes.
Contact an Experienced Ohio Estate Planning Attorney
A knowledgeable estate planning attorney can best advise whether a transfer on death account vs. a payable on death account is right for your situation. At Middleton Law Offices, we offer every client the personalized time and attention they deserve as we guide them through the estate planning process. Located in Bowling Green, Middleton Law Offices has been serving clients in Ohio for estate planning matters for over a century. Contact Middleton Law Offices today at 419-352-7522 for a consultation to learn how we can help.
Articles appearing in this column are intended to provide broad, general information about the law. This article is not intended to be legal advice. Before applying this information to a specific legal problem, readers are urged to seek advice from a licensed attorney.
