“Payable on Death” and Your Financial Accounts

Here’s a riddle, and you may not find the answer funny: when does a beneficiary named in a will not get the assets left to them in a will? The answer is when the asset is payable on death to someone else. Ohio law authorizes individuals to enter into contracts with banks and other financial institutions to make the contents of a financial account payable to a designated beneficiary on the owner’s death. These are called “payable on death” or “POD” accounts if the funds are in a bank account. Brokerage accounts and other assets, like car titles and even real estate, may be “transfer on death” or “TOD.” POD and TOD assets operate similarly, with the same advantages and disadvantages.

Advantages of Payable on Death Accounts

At first glance, POD accounts appear to have a number of advantages. For one thing, they bypass probate court. Upon the death of an account holder, the designated beneficiary needs only to present the required documentation of the death to the entity holding the account. The asset is turned over to the beneficiary without probate involvement.

The process is usually pretty straightforward for the recipient of the asset, and a payable on death designation is not difficult for the original owner of the asset to set up. Often, it only takes the completion of a form. If you create a beneficiary designation and later decide to change it, you can do so without too much effort.

POD accounts have some protections in place for both you and your designated beneficiary. Unlike a joint bank account with rights of survivorship, your intended beneficiary has no right to access (and perhaps drain) the account while you are alive. This protects you, of course, but since the intended beneficiary has no right to the account until your death, their creditors are similarly unable to reach the assets in the account while you are alive.

All of this might sound good—until you consider the many disadvantages of POD accounts.

Disadvantages of Payable on Death Accounts

Lack of Creditor Protection

POD accounts may have benefits, but there can be serious disadvantages, too. The protection from creditors that the POD account provides for your beneficiaries evaporates when you die. As soon as they have the right to the assets in the account, their creditors can swoop in like vultures, snatching up the assets you carefully preserved for your loved ones.

Unintended Beneficiaries

If you have a POD account, it is important to regularly review your beneficiary designations to avoid an outcome you don’t intend. One such possible scenario involves a named beneficiary who dies before you or is incapacitated. If you fail to update your beneficiary designation after your beneficiary dies, account assets will be distributed to any surviving named beneficiaries on the account. If there are none, the assets will need to be probated. This may not be what you wanted.

For instance, if you named your three adult children as beneficiaries, you may have planned that if one of them predeceased you, their children would get the deceased parent’s share of the asset. In reality, it would go to the two surviving siblings, shutting out your grandchildren who have lost their parent.

You lose control of what happens to a POD asset after it is in the hands of your named beneficiary. For instance, if you name your eldest child as beneficiary, with firm instructions that they are to share account assets with their siblings, they are under no legal obligation to do so.

Also, if you name multiple beneficiaries to a POD account, they will each take equal shares of the assets upon your death. If you want one beneficiary to receive more or fewer assets than another, a POD designation is a bad idea.

Loss of Eligibility for Benefits for Beneficiaries

You probably intend the assets in the account to make life easier for your beneficiaries, but in fact, it could do just the opposite. If your beneficiary goes into a nursing home before they receive the assets, the sudden influx of assets could cause them to lose their eligibility for Medicaid benefits to pay for the nursing home. Similarly, if your beneficiary has special needs, receiving the account assets could jeopardize their eligibility for means-based government benefits that they need to survive.

Need for Guardian for Minor Beneficiaries

If your beneficiary is a minor, a guardian may need to be appointed by the probate court to manage the assets the minor child inherited. That could be cumbersome and costly. Once the minor reaches legal adulthood at the age of 18, they could have unrestricted access to the assets, which they may be unprepared to handle responsibly.

Legal Incapacity of POD Account Owner

If you become legally incapacitated, your beneficiary on a POD account would not have access to account assets. This could be a problem if they need those assets to pay your regular bills.

If you become legally incapacitated and your agent under a power of attorney takes over your finances, other problems could arise. Under Ohio law, your agent, or attorney-in-fact, does not have the authority to change a beneficiary designation unless you expressly grant that power. If the attorney-in-fact tries to do so anyway, and bank personnel does not know enough to prevent them, more confusion, litigation, and unintended outcomes could ensue.

Potential for Probate Litigation

And remember the riddle in the opening paragraph? Here’s your answer: if you make a beneficiary designation, but leave the asset to a different person in your will (perhaps because you forgot the account was POD), the beneficiary designation will override the provision in your will, regardless of when either the will or the beneficiary designation was made. This could lead to an outcome other than what you intended, and likely to a dispute between the persons named in your will and on the beneficiary designation.

Those are some of the problems that could emerge even if the POD account functions exactly as it is supposed to. POD accounts are essentially created by a contract, and regulated by statute. The “contract” is typically a signature card at the bank or financial institution indicating POD instructions. The account holder usually doesn’t have a copy. If the bank fails to maintain the signature card, the account owner’s intentions could be subverted. Think it’s a far-fetched scenario? It’s happened in at least one Ohio court case, with disastrous results.

Better Alternatives to a Payable on Death Account

Fortunately, there is a relatively simple way to recognize all of the advantages of POD accounts and eliminate all of the negatives. By creating a trust as owner of your accounts, you can still bypass probate, easily use and manage assets during your lifetime, and control what happens to the assets after your death.

A trust can let you make sure that a minor beneficiary has their needs provided for without giving them unrestricted access to an inheritance. A special needs trust can allow you to provide for a beneficiary with special needs without jeopardizing their eligibility for benefits. If one of your intended beneficiaries predeceases you, the trust will name the successor beneficiaries that you choose. You can prevent disputes between your heirs and make sure that your assets go to the people you intend to have them.

If you have questions about the risks of POD accounts, or how to use a trust to avoid the dangers of a POD account, contact an experienced Ohio estate planning attorney to schedule a consultation.