What Is a Payable on Death Account (Do I Need a Will if I Have One)?

When you login to your bank account online, you might notice an option to choose a beneficiary. Generally, a beneficiary is someone who’d inherit your account after your death. The official name is a “payable on death” bank account or POD account.

Easy enough. Enter your beneficiary’s name and contact info: Done. So, if you go this route, do you still need a will? Isn’t it easier to just type in your beneficiary’s name and be done with it?

The short answer is that, when done right, most people would benefit from both a payable on death designation and a last will and testament. POD accounts are better for quick cash for people handling your final affairs or counting on money for bills, while your will lets you get into clearer detail about the more nuanced aspects of settling your estate.

What Is a ‘Payable on Death’ Account?

What does POD mean? POD and TOD stand for “payable on death” and “transfer on death,” respectively. (TOD would be more likely to apply to assets such as a house.)

Most types of financial accounts—such as savings and checking accounts, CDs and investment account—let you name a POD beneficiary.

If you die, this person would inherit the money without going through probate (the often-lengthy process of executing a will). Generally, all he or should would need is ID and a copy of the death certificate. That’s generally ready in a matter of days to a few weeks after a death.

TOD is somewhat less common than POD, but some states will let you designate someone to inherit property like a house outside of probate. To set this up, you’d need to prepare a special deed and record it with the appropriate state or county office.

You can set up a POD beneficiary for a joint account with your spouse, as well. If you die, the account would go to your spouse first, and then to the POD beneficiaries after your spouse’s death.

You can also name multiple POD beneficiaries. Talk to an advisor at your bank if you want to assign a different proportion other than an even split. Ditto if you want to choose an alternate beneficiary in case your primary beneficiary is not around. It’s also worth searching your state’s law on whether a POD account would still pass to your (ex-)spouse if you divorce.

POD Account Advantages

POD and TOD accounts can help you transfer money quickly to people who depend on you, without having to go through a time-consuming probate process.

Here are some examples of situations in which a payable on death beneficiary could be especially useful:

• Couples who keep some or all of their finances separate could benefit from naming each other as POD beneficiaries to get access to bank accounts quickly. (Couples who only have joint accounts don’t need to do this because they already co-own accounts.)

• If you’re paying bills for a non-minor child, you might name him as your POD. That way, you can continue to cover those costs with minimal interruption, even if something happened to you. (Minors can’t be POD beneficiaries.)

• You might name someone the POD of an account that you intend to be used for your final expenses. Funerals are expensive, and the process of executing your will costs money. Banks can often activate a payable on death bank account transfer fairly immediately, which means your beneficiary wouldn’t need to wait for your will to be fully executed before being reimbursed for funeral costs.

• POD can also provide faster compensation and reimbursement for the executor of your estate. An executor may be entitled to a certain amount of compensation, depending on state law, so POD can be a convenient way to provide that money.

POD Account Pitfalls

First, be aware that your payable on death beneficiary can spend the money as he wishes. If you want funds to go toward your minor children’s education, for example, talk to an estate planning attorney. It may be better to think about trust funds than name a divorced co-parent or your intended guardian as the beneficiary.

Keep in mind that claims or debts on the property (like a mortgage) follow the transfer. Probate can be a better option if you don’t own the property outright. That’s because executing a will includes dealing with outstanding debts, which may lead to a decision to sell a house with a considerable mortgage. TOD basically says to the beneficiary, “Your house, your problem.” Going through a will and probate, by contrast, could make it easier for the executor and heirs to assess the house as part of the estate’s overall assets and liabilities.

Another mistake some people make with payable on death accounts is leaving the account to one person who’s supposed to distribute the funds among other people. For example, maybe you want to designate one child to distribute the money among all your children, or you want to designate your child to distribute the money among your grandkids. If you go this route, first, that person isn’t actually required to fulfill your wishes. And, second, she may even be on the hook for gift taxes if she follows your wishes.

Executing a will isn’t a fun process, but life can often be too complicated for a payable on death account to handle all its nuances.

“People say, ‘I’ll make it easy, you don’t have to go through probate,’ but there are times when it’s the worst thing you could possibly do,” says Carol Schifter, a family law and estate planning attorney.

Another potential pitfall crops up if you get a divorce. Depending on state law, divorce may or may not void a POD account. Even if your will is perfectly clear about your wishes, it may not legally supercede conflicting beneficiary information (i.e. if your ex is still listed as your POD beneficiary). In a case like that, loved ones could end up with the double hit of missing out on a financial inheritance and feeling frustration over not being able to carry out your will as written.

Another major mistake, according to Schifter, is naming a POD beneficiary who’s planning to pursue higher education.

“If a person names an 18-year-old, that is old enough to receive the money, but you just screwed them for financial aid,” she says. She often advises her clients to put money in a trust for beneficiaries under 25, enabling them to pursue college and grad school without any inheritance income affecting their financial aid eligibility.

“If you’ve got a special needs child who’s getting government benefits, they can’t have more than a tiny amount of money in their own name,” Schifter says. “You may have just kicked them off of benefits” by leaving them money directly.

You’ll almost certainly need to set up a trust for minors and dependents with special needs. That means creating a will, where you can get into enough detail about trustees and account management.

Even if your immediate heirs aren’t underage and don’t have special needs, someone else related to you might. If you die without a will and your POD beneficiaries aren’t available, your accounts go through intestate succession. That means the state court follows hereditary order to identify your next of kin. You may end up leaving your estate to someone you didn’t plan for, and who may not be able to collect the inheritance without a complicated legal process (think court-appointed conservator management).

POD accounts are convenient because they’re meant to simplify your estate planning. But in some cases that means that they might oversimplify. For instance, would you rather leave money to your best friend or a far-flung cousin, if it got to that point? Creating a will can help you avoid having your assets dividing according to the state’s default.

Does a POD or TOD Account Overrule a Will?

If your POD says one thing and your last will and testament says another, the POD account usually overrides the will.

Just like with a life insurance policy, it’s incredibly important to make sure you update beneficiaries when you undergo a major life change. Even if your will is the more current document, in many cases it won’t overrule your beneficiary designation. So make sure all your financial accounts reflect your real wishes. (Here's more on how wills and life insurance work together.)

Why Wills Still Matter

Let’s say your finances are pretty basic overall: a checking and savings account, a 401(k), a term life policy that names your spouse as beneficiary, and perhaps a CD or small investment portfolio. Can you set all accounts up through POD and skip a will?

In many cases, a will is still an essential document. POD can be convenient, but it’s not designed to handle the nuances that can easily arise with even a relatively straightforward estate plan.

The following goals can be difficult to execute through POD or TOD alone:

• Protect minors: Generally, you’ll want to set up a trust and designate preferred guardians and financial custodians for minors in your care. Otherwise, a probate judge will need to appoint a financial guardian. You can also set the trust so your child won’t inherit until they’re past college age, to avoid jeopardizing financial aid.

• Name guardians: Besides financial care, kids need a stable home. Choosing a trusted guardian is an essential benefit of writing a will.

• Leave property: Not all states offer TOD options for real estate and other property. If you own your home, your car or other important property, your will is the best place to leave instructions for these assets.

• Set conditions: Courts generally do their best to honor conditions you set in your will. You can designate someone to inherit only after enrolling in college or undergoing treatment for addiction, for example. You can leave conditional bequest instructions directly in a will or in the trust documents. In either case, consult an attorney to make sure the conditions are likely to hold up in court.

• Leave instructions: Similarly, a will gives you more room to leave instructions to settle potential conflicts. If, for example, you designated multiple beneficiaries for a certificate of deposit (CD) at a bank, what happens if one person wants to cash out his share (and incur the resulting penalties) before the renewal period, and the other doesn’t? Your will has more room to address these kinds of situations.

• Handle complex beneficiary arrangements: While you can name multiple POD beneficiaries, a will is better for leaving money to a group of relatives (like grandchildren, including any who haven’t been born at the time you write the will).

• Leave money to charity: Generally, a POD beneficiary has to be a “natural person” (i.e. an individual) rather than an organization.

• Settle estate taxes and debts: States (and, for estates worth more than $11.4 million, the IRS) collect estate taxes, and creditors expect to settle outstanding debt from the assets you leave behind. State laws vary on how exactly officials and creditors go about collecting, but they’re likely to have a much easier time going through probate than chasing down various POD beneficiaries. To be honest, leaving everything in POD accounts could deter some creditors from going through the hassle of hounding your loved ones, but you’re taking a big gamble. Financial institutions may require your beneficiary to sign a statement that you don’t have outstanding debt before they can collect on a POD account. Trying to prevent government officials or creditors from collecting what they’re owed risks sticking your loved ones in a stressful financial situation (especially if they spend their share before realizing the money was taxable).

A payable on death account and a will are both powerful tools when it comes to estate planning. You’ll be best positioned if you use them in tandem, playing to the strengths and weaknesses of each.

A POD account can be a helpful way to get some immediate funds to the people who depend on you or who will handle your final arrangements. A will, meanwhile, is still better for handling the more complicated elements of your final wishes, debts and estate tax obligations.

Handled wisely, a combination of POD accounts and instructions in your will can offer the best of both worlds in terms of a clear, thorough plan for what you leave to your loved ones.

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