Payable on Death (POD)

What Does Payable on Death Mean?

Payable on death (POD) is a bank account type or designation. It applies to accounts when the account owner designates a beneficiary or beneficiaries for the account. The assets from the account are transferred to the beneficiary(ies) upon the owner’s death.

How Does a POD Account Work?

The owner will designate the account as “payable on death” by designating a beneficiary or beneficiaries on the account in the event of their death. The owner can provide simple instructions to the bank, either when the account is opened or later on.

What Are the Advantages of a POD Account?

The POD account is often used as a low cost, simple tool in estate planning in that the assets held in the POD account pass directly to the named beneficiary or beneficiaries, bypassing the probate process. In order to claim the assets, the beneficiary merely must show proof of identification and a certified copy of the deceased account owner’s death certificate.

One of the benefits of the POD account is that the owner maintains complete control over the assets. Unlike a joint account, with a POD account the owner can decide how the assets are to be invested or directed. Named beneficiaries cannot withdraw money from POD accounts as they have no stated ownership. 

Another advantage of a POD account is additional FDIC insurance coverage. The FDIC insures a single individual account at a particular institution for up to $250,000. However, an individual can open up to five separate accounts at one institution, each insured for $250,000, if each account has a different POD beneficiary. In effect, the individual receives $1,250,000 of FDIC coverage at a single institution. 

What Are the Disadvantages of a POD Account?

While POD accounts can be an efficient estate planning tool in that the assets will pass to an heir outside of probate, there are certain disadvantages.

Some financial institutions require that multiple beneficiaries receive equal shares, which may not be the owner’s wish. Also, POD beneficiaries receive the entire value of the account, which also may not accord with the owner’s wishes.

Lastly, POD accounts typically do not allow contingent beneficiaries. If a designated beneficiary dies, it’s up to the account owner to replace the beneficiary.

Are There Taxes on a POD Account?

The short answer is “yes.” The original owner of the account is liable for any taxes on income or capital gains generated by the investments.

Once the account passes to the named beneficiary, the new owner will be liable for any taxable consequences going forward as long as the account is maintained. There is no federal income tax on the amount received by the beneficiary nor is there any federal inheritance tax owed. However, individual states may tax inheritance.