Transfer and payable on death account designations | Wealth Planning Update (2024)

The following information and opinions are provided courtesy of Wells Fargo Bank, N.A.

Transfer on death (TOD) and payable on death (POD) designations can be useful methods of transferring assets to heirs when used in conjunction with a well-thought-out estate plan.

Reviewing the asset titling and designated beneficiaries of accounts is a sound practice at the time an estate plan is updated. Otherwise, a disconnection may happen between how assets are designated and the objectives of the intended plan based on unforeseen events and circ*mstances.

How do transfer on death designations work?

There are various components to the titling of assets: One is using a transfer on death (TOD) designation, generally used for investment accounts, or a payable on death (POD) designation, used for bank accounts, which act as beneficiary designations, stating to whom account assets are to pass when the owner dies. Similar to designating beneficiaries on retirement accounts [individual retirement accounts (IRAs) and 401(k)s] and insurance policies, accounts with TOD and POD designations are not subject to the probate process.

Benefits of TOD/POD:

• Beneficiary designations, such as TOD/POD, are simple to implement, generally have no associated cost, and allow for the account to transfer to the named beneficiary in a streamlined fashion. It is customary that upon the account owner’s death, the beneficiary provides the death certificate and identification to the financial institution to receive the funds.
• For qualifying accounts, depositors may qualify for coverage over $250,000 if they have funds in account different ownership categories and all FDIC requirements are met.
• TOD/POD designations can help avoid the probate process because the account transfers directly to the beneficiary by contract, not through a will.
• For jointly held assets, such as an account that is titled as joint tenants with right of survivorship, upon one joint owner’s death, the surviving joint owner will retain the asset until his or her death, at which time the named TOD/POD designee would receive it. The surviving joint owner will have the option to change or eliminate the designation during their lifetime.

Other considerations

TOD and POD rules vary by state. Depending on where you reside, you may need to consider the following. Please check your state law’s rules.

• For any administrative costs or estate taxes due at death, assets that pass by TOD/POD are not included in a pro rata portion of those expenses. For example, if one beneficiary receives an investment account by TOD/POD and another beneficiary receives the residence based on the will, the latter may not have sufficient liquidity to pay for their pro rata share of the expenses.
• During lifetime and at death, TOD/POD assets are subject to creditors' claims. Although these accounts pass directly to the beneficiary and bypass the probate process, if the executor does not have enough probate assets to pay the debts of the estate, creditors may be entitled to make a claim against the non-probate assets, including TOD/POD accounts. In addition, when a beneficiary receives assets outright, they will enjoy no protection from a lawsuit, creditors, divorce, or other claims as they would if the assets were held in trust.

Tax-efficient planning

In a large estate (above the federal estate tax exemption amount), the tax impacts can be of concern. There may be provisions in estate documents to divide an estate by funding credit shelter trusts, marital trusts, and/or generation-skipping trusts; passing assets outright to beneficiaries via TOD/POD may mean that these tax-planning strategies are not utilized to their full potential, resulting in an inefficient use of exemptions and possible loss of creditor protection. Even with modest estates, plans may include the ability to disclaim assets for added flexibility and the opportunity to implement a proper post-mortem plan. However, if the accounts pass outright through a TOD/POD provision and the heir receives benefits from the assets, the ability to properly disclaim may be lost.

When your circ*mstances change

If you have an unexpected illness or disability and you need to access the TOD/POD account funds to cover medical bills, you may inadvertently diminish the amount those heirs were to receive or disinherit a beneficiary by exhausting the funds. Unknowingly causing some heirs to receive a greater portion of your wealth than others can add undue stress and discord to family relationships.

What is the right choice for you?

At some point in the future, you may think differently about how you would like to make gifts to your heirs and philanthropic causes. When your goals and interests evolve, it is important to update your estate plan. Periodically reviewing the titling of your assets, including TOD/POD beneficiary designations, alongside your estate plan is a recommended best practice. Work with your advisors and tax and legal professionals to consider your estate plan when opening new accounts or acquiring, divesting, or gifting assets. This may present opportunities to avoid potential unwelcome surprises and impacts.