Set Up Payable-on-Death Accounts
Payable-on-death bank accounts offer one of the easiest ways to keep money -- even large sums of it-out of probate. All you need to do is properly notify your bank of whom you want to inherit the money in the account. The bank and the beneficiary you name will do the rest, bypassing probate court entirely. It's that simple.
This kind of account has been called the "poor man's trust." The description is apt (if sexist) because a payable-on-death account does accomplish for a bank account-for free-exactly the same result as would an expensive, lawyer-drawn trust.
As long as you are alive, the person you named to inherit the money in a payable-on-death (P.O.D.) account has no rights to it. If you need the money-or just change your mind about leaving it to the beneficiary you named-you can spend the money, name a different beneficiary or close the account.
PAYABLE-ON-DEATH ACCOUNTS AT A GLANCE
They're easy to create.
There's no limit on how much money you can leave this way.
Designating a beneficiary for a bank account costs nothing.
It's easy for the beneficiary to claim the money after the original owner dies.
You can't name an alternate beneficiary.
PAYABLE-ON-DEATH ACCOUNT OR "TOTTEN TRUST"?
Payable-on-death accounts go by different names in different states-and sometimes in the same state. Your bank, for example, may respond to your request for a payable-on-death account by handing you a form that authorizes the creation of something called a "Totten trust." Payable-on-death bank accounts are also sometimes called tentative trusts, informal trusts or revocable bank account trusts. "Totten trusts" are really just payable-on-death accounts. The name comes from an old New York case (Re Totten), which was the first case to rule (in 1904) that someone could open a bank account as "trustee" for another person who had no rights to the money until the depositor died. Other courts had balked at this, objecting that such an account was tantamount to a will, which had to fulfill detailed legal requirements to be valid. The Totten court called the account a "tentative" (revocable) trust. After this decision, courts in many other states adopted the idea of Totten trusts. Later, state legislatures enacted statutes authorizing payable-on-death accounts, specifically addressing many of the questions that had sprung up about Totten trusts. For example, some statutes state exactly how you can change a payable-on-death designation.
A. The Paperwork
Banks, savings and loans and credit unions all offer payable-on-death accounts. They don't charge any extra fees for keeping your money this way. You can add a payable-on-death designation to any kind of new or existing account: checking, savings or certificate of deposit. Setting up a payable-on-death bank account is simple. When you open the account and fill out the bank's forms, just list the beneficiary on the signature card. The bank may also ask you for some other information, such as the beneficiary's address and birth date. (For example, the current address of each beneficiary is required by law in a few states.) The beneficiary of a payable-on-death account, who is commonly referred to as a "P.O.D. payee," doesn't have to sign anything.
Example: Magda wants to leave her two nieces some money. She opens a
savings account at a local bank, deposits $10,000 in it, and names her two
nieces as payable-on-death beneficiaries. After Magda's death ten years
later, they claim the money in the account-including the interest paid
by the bank-without going through probate.
If you choose an account that has restrictions on withdrawals-for example, a 24-month certificate of deposit-the early withdrawal penalty will probably be waived if you die before the period is up. If you've considered changing a solely owned bank account to a joint account with the person you want to inherit the money after your death, you may be better off by simply naming the person as the P.O.D. beneficiary instead. There are several advantages. If you added another person's name to yours on the account, he or she would immediately have the right to withdraw money from the account. And if she got behind on her debts, a creditor could come after her share of the account. (See Chapter 5, Hold Property in Joint Ownership.) Example: Matthew, an elderly widower, goes down to his bank and makes his daughter, Doris, the payable-on-death beneficiary of his checking account. Doris (and her creditors) will have no access to the money during Matthew's life, but after his death she'll be able to get the funds in the account quickly and easily.
Don't create a joint account just to avoid probate. If you want to leave money to someone at your death-but not to give it away now-stick to a P.O.D. account. It will accomplish your goal simply and easily. Don't set up a joint account with the understanding that the other person will withdraw money only after you die. This is a common mistake, and it often creates confusion and family fights.
B. Adding a P.O.D. Designation to a Joint Account
P.O.D. accounts can be very useful for couples who have joint bank accounts.
1. Accounts With a Right of Survivorship
Most joint accounts come with what's called the "right of survivorship," meaning that when one co-owner dies, the other will automatically be the sole owner of the account. So when the first owner dies, the funds in the account belong to the survivor-without probate. If you add a P.O.D. designation, it takes effect only when the second owner dies. Then, whatever is in the account goes to the P.O.D. beneficiary you named. Example: Virginia and Percy keep a joint checking account with several thousand dollars in it. They hold this account as joint tenants with right of survivorship.
They decide to name their sons, who are both adults, as P.O.D. beneficiaries. After both Virginia and Percy have died, the bank will release whatever is left in the account to the sons, in equal shares. It's important for both spouses (or other co-owners) to realize that designating a P.O.D. beneficiary for a joint account doesn't lock in the surviving spouse after one spouse dies. The survivor is free to change the beneficiary or close the account, shutting out the beneficiary who was named back when both spouses were still alive. Example: Howard and Marge name Elaine, Howard's daughter from a previous marriage, as the P.O.D. payee of their joint savings account. Howard dies first, and in the years that follow relations between Marge and Elaine deteriorate. Marge decides to remove Elaine as P.O.D. beneficiary and instead name her nephew, Max. When Marge dies, Elaine doesn't inherit any of the money in the account-even though she's firmly convinced that her father intended her to.
Adding a P.O.D. beneficiary to a joint account not only avoids probate, but allows you to plan for the unlikely event that both persons die simultaneously.
Example: June and Horace have a joint savings account. They name their daughter, Virginia, as the payable-on-death beneficiary. When June and Horace are killed in an accident, Virginia inherits the money in the account without probate.
2. Accounts With No Right of Survivorship
Some kinds of joint accounts cannot be turned into payable-on-death accounts. Unless your joint account provides that when one owner dies, the other automatically becomes the sole owner, don't try to name a P.O.D. payee for the account.
Two common situations where this advice applies are:
Your state law requires you to request the right of survivorship in writing when you open the account, and you didn't make the proper request. In that case, the account is not a joint tenancy account; it's what is known as a "tenancy in common" account, which means that you can leave your share to anyone you choose.
You and your spouse live in a community property state and own a community property account together. Such accounts don't carry the right of survivorship; each spouse has the right to leave his or her half-interest to someone else.
Don't use a P.O.D. designation for a joint account that doesn't have the right of survivorship. In other words, don't try to arrange things so that a P.O.D. payee inherits just your share of a co-owned bank account at your death. It's far more reliable and less confusing to establish a separate account and name a P.O.D. payee for it.
C. Choosing Beneficiaries
There are few restrictions on whom you can name as a P.O.D. beneficiary.
But there are some issues you should think about as you make your choices.
EXTRA FDIC COVERAGE FOR MOST BENEFICIARIES
Payable-on-death accounts get extra coverage from the Federal Deposit Insurance Corporation, in some cases. It depends on who the beneficiaries are.
The general rule is that the FDIC insures each person's accounts at a financial institution up to $100,000. But with a P.O.D. account, each beneficiary's interest in the account is insured for up to $100,000 -- if the beneficiary is a close relative of the account owner. To get this extra protection, the beneficiary must be a spouse, child, grandchild, parent or sibling.
For example, if you have a $300,000 account and name your spouse and your son as P.O.D. beneficiaries, the whole $300,000 is covered by FDIC insurance. You get $100,000 coverage as an individual, and your spouse and son are also entitled to $100,000 each in coverage.
It's perfectly fine to name a minor-that is, a child less than 18 years old-as a P.O.D. payee. If the account is worth more than a few thousand dollars, however, you should think about what might happen if that beneficiary is still a child at your death. You will probably want to arrange for an adult to manage the money for the child. If you don't, and a minor child inherits money from a payable-on-death account, one of three things will happen:
If state law allows it, the money, no matter how much, can simply be given to the beneficiary's parents (or to the beneficiary, if he or she is married). The parents hold the money for the benefit of the child. Unfortunately, only a few states (listed below) follow this sensible approach.
If the amount is relatively small-generally, a few thousand dollars, depending on state law and bank custom-the bank will probably turn it over to the child or the child's parents.
If the amount is larger, the parents will probably have to go to court and ask to be appointed guardians of the money. (If the parents aren't alive, a guardian will probably already have been appointed and supervised by the court.)
Fortunately, court involvement, which can be expensive, intrusive and time-consuming, can be easily avoided. You can choose someone, now, and give that person authority to manage the money, without court supervision, in case the child is still under 18 at your death. The logical choice, usually, is one of the child's parents.
WHERE PARENTS CAN COLLECT MONEY A CHILD INHERITS AS P.O.D. PAYEE
Michigan (up to $5,000)
New York (up to $10,000)
The easiest way to do this, in most states, is to name an adult to serve as "custodian" of the money. Custodians are authorized under a law called the Uniform Transfers to Minors Act (UTMA), which has been adopted by every state except South Carolina and Vermont. All you need to do is to name the custodian as the P.O.D. payee of the account and make it clear that the custodian is to act on the child's behalf. That gives the custodian the legal responsibility to manage and use the money for the benefit of the child. Then, when the child reaches adulthood, the custodian turns over what's left to the beneficiary. Most, but not all, UTMA states set 21 as the age when the custodianship ends. (The ages are listed below.)
Example: Alice wants to make her grandson, Tyler, the P.O.D. payee of a bank account. But Tyler is just 9 years old. So Alice decides to name Tyler's mother, Susan, as custodian of the money in the account. On the bank's form, Alice puts, in the space for the P.O.D. payee, "Susan Irving, as custodian for Tyler Irving under the Florida Uniform Transfers to Minors Act."
If Tyler is not yet 21 when his grandmother dies, Susan will be legally in charge of the money until Tyler's 21st birthday.
Age at Which an UTMA Custodianship Ends
Alabama 21 Missouri 21 Alaska 18 to 25* Montana 21 Arizona 21 Nebraska 21 Arkansas 18 to 21* Nevada 18 to 25* California 18 to 25* New Hampshire 21 Colorado 21 New Jersey 18 to 21* Connecticut 21 New Mexico 21 Delaware 21 New York 21 District of Columbia 18 to 21* North Carolina 18 to 21* Florida 21 North Dakota 21 Georgia 21 Ohio 21 Hawaii 21 Oklahoma 18 to 21* Idaho 21 Oregon 21 Illinois 21 Pennsylvania 21 Indiana 21 Rhode Island 18 Iowa 21 South Dakota 18 Kansas 21 Tennessee 21 Kentucky 18 Texas 21 Louisiana 18 Utah 21 Maine 18 to 21* Virginia 18 to 21* Maryland 21 Washington 21 Massachusetts 21 West Virginia 21 Michigan 18 to 21* Wisconsin 21 Minnesota 21 Wyoming 21 Mississippi 21 *The person who sets up the custodianship can designate the age, within these limits, at which the custodianship ends and the beneficiary inherits the money outright.
IF YOU DON'T LIVE IN AN UTMA STATE
Even if you live in a state that has not adopted the UTMA, you may still be able to enjoy the law's benefits. The law is written so that you can appoint a custodian if any of the following is true:
The custodian lives in a state that has adopted the law.
The minor lives in a state that has adopted the law.
The bank account (the "custodial property," in the terms of the statute) is located in a state that has adopted the law.
Example 1: Christopher is a resident of South Carolina, which has not adopted the UTMA. His grandson, however, lives in California, which has. Christopher can appoint a custodian for his grandson under the California Uniform Transfers to Minors Act. As long as the boy is a resident of California when the transfer takes place, the transfer is valid under the UTMA.
Example 2: Eunice, a Vermonter, keeps an account in a New Hampshire bank. She can use the New Hampshire UTMA to appoint a custodian for her granddaughter. On the bank forms, she can name "Esther Stanhope, as custodian for Michelle Stanhope under the New Hampshire Uniform Transfers to Minors Act."
2. Multiple Beneficiaries
You may well want to name more than one person to inherit the money in a bank account-for example, your three children or two good friends. That's no problem; you just name all the beneficiaries on the bank's form. Each will inherit an equal share of the money in the account unless you specify otherwise.
Be careful when setting up unequal shares. In a few states-Florida, for example-you cannot change the equal-shares rule. If you're concerned about this issue, check your state's law or open a separate account for each beneficiary.
It's important to realize that you can't name an alternate payee-that is, someone to inherit the money if your first choice doesn't outlive you. In other words, if you list three payees on a bank's form, the bank won't consider your list to be a ranking in order of preference. For example, some bank forms provide three spaces for beneficiaries' names. It's not uncommon for people to assume that beneficiary #1 will get all the money, and that if he isn't alive at your death, then #2 will inherit it, and so on. But that's not the way it works. All the beneficiaries you name will share the money in the account.
If one of the beneficiaries dies before you do, all the money will go to the surviving beneficiaries. So if you leave an account to your three children, and one of them dies before you do, the other two will inherit the funds. Depending on your family situation, this result may be fine with you-or it may not. If it's not what you want, you should name new P.O.D. payees after a beneficiary dies.
Example: Miranda names her sons, Brad and Eric, as P.O.D. beneficiaries of her bank account. Eric dies before Miranda does, leaving two children of his own. Unless Miranda changes her bank account papers to include the grandchildren as P.O.D. beneficiaries, they will not inherit their father's share. Instead, all the money in the account will belong to Brad when Miranda dies.
It's unlikely, but your state's law may restrict your ability to name an institution, such as a school, church or other charity, as the beneficiary of a P.O.D. account. Delaware law, for example, requires the beneficiary to be "a natural person."
Such a requirement can frustrate attempts to leave money as you wish. In 1981, for example, an Ohio court invalidated a payable-on-death designation on a certificate of deposit that named a church as the beneficiary. The court ruled that state law required a P.O.D. beneficiary to be a "natural person," not a corporation. (Powell v. City Nat. Bank & Trust Co., 2 Ohio App. 3d 1, 2 Ohio BR 1, 440 N.E.2d 560 (1981).) After this decision, the Ohio legislature changed the law to allow any entity or organization to be a P.O.D. beneficiary.
4. Your Spouse's Rights
You may not have complete freedom to dispose of the funds in a bank account-even if it's in your name-as you wish. Your spouse may have rights, too. It depends on your state's law.
COMMUNITY PROPERTY STATES
*Only if spouses sign a community property agreement.
NON-COMMUNITY PROPERTY STATES
All other states
You can't shortchange creditors or family. If you don't leave enough other assets to pay your debts and taxes or to support your spouse and minor children temporarily, a P.O.D. bank account may be subject to the claims of creditors or your family after your death. If there is any probate proceeding, your executor can demand that a P.O.D. beneficiary turn over some or all of the funds so that creditors can be paid. If you specifically pledged the account as collateral for a debt, the creditor is entitled to (and doubtless will) claim repayment directly from the funds in the account. The P.O.D. payee gets whatever, if anything, is left. a. Spouses' Rights in Community Property States If you live in a community property state, your spouse probably already owns half of whatever you have in a bank account, even if the account is in your name only. If you contributed money you earned while married, that money and the interest earned on it is "community property," and your spouse is legally entitled to half.
There are a few exceptions to this rule: Your money is yours to do with as you please if you and your spouse have signed a valid agreement to keep all your property separate. And your spouse does not have any right to your separate property-money you deposited before you were married, or money that you alone inherited or received as a gift-unless that money has been mixed with community property in a bank account and is impossible to separate.
If the money in your account is community property, and you want to name someone other than your spouse as the P.O.D. beneficiary for the whole account, it's a good idea to get your spouse's written consent. Otherwise, your spouse could assert a claim to half of the money in the account at your death, leaving the beneficiary you named with only half. b. Spouses' Rights in Non-Community Property States If you leave money in a P.O.D. bank account to someone other than your spouse, make sure your spouse doesn't object to your overall estate plan. In non-community property states (all states except the nine listed above), surviving spouses who are unhappy with what the deceased spouse left them can claim a certain percentage of the deceased spouse's property. This is called the spouse's "statutory share," and in most states it amounts to about a third of what the spouse owned. It's a fairly rare occurrence, however, for a spouse to go to court over this, because most spouses inherit more than their statutory share. The funds in a P.O.D. account may be subject to a spouse's claim-or they may not, depending on state law. Some states consider such accounts outside the surviving spouse's reach.
It's an infrequent practice these days, but some couples make legally binding agreements to leave property to each other. They sign a contract that requires them in turn to sign wills leaving all their assets (or part of them) to each other. These contracts have been ruled to take precedence over a payable-on-death designation on a bank account. In other words, the P.O.D. designation gets wiped out by the contract.
Example: Scott and Terry sign a contract in which each promises to make a will leaving all their assets to the other. Later, Scott adds a payable-on-death designation to his savings account, naming his brother as the beneficiary. If Scott dies first, Terry has a legal right to the funds in the account.
D. If a Beneficiary Dies Before You Do
People usually choose people younger than themselves to inherit their money and property, fully expecting them to outlive their elders. But sometimes this natural course of events is disrupted. If someone you have named as a P.O.D. beneficiary dies before you do, you should change the necessary paperwork at the bank to put a new beneficiary in place. If you named more than one payee, and one or more of them dies before you do, the funds in the account will go to the survivor(s) at your death. (See Section C, above.)
If, however, none of the P.O.D. payees you named is alive at your death, the bank will release the funds in the account to your executor, who will be responsible for seeing that the money is distributed under the terms of your will or state law. The money will probably have to go through probate, unless your estate is small enough to qualify for special, simpler procedures (see Chapter 7, Take Advantage of Special Procedures for Small Estates).
If you want to name alternate beneficiaries, don't rely on a P.O.D. account. Banks generally don't allow you to name an alternate P.O.D. payee -- that is, someone who would inherit the money if none of your primary beneficiaries outlived you.
Your will, if you make one (and you should, for reasons like this one) functions as a back-up in this case, as explained below. But that doesn't avoid probate. If you want to name a back-up beneficiary and be sure of avoiding probate, you'll probably want to use a living trust. (See Chapter 6.)
Depending on state law, however, the bank may be able to release the money directly to your legal heirs-the close relatives who are entitled to inherit from you if you don't leave a will. In that case, the money won't have to go through probate.
If the money goes to your executor, it will be distributed under the terms of your will, even though you most likely didn't even mention this account in your will. That's because most wills contain what is called a "residuary clause," which names a beneficiary to inherit everything that's not specifically mentioned in the will. The person you named to inherit this "residuary" property would receive this money. Example: Mark names his brother as the P.O.D. beneficiary of his savings account. But his brother dies, and Mark, confined to a nursing home, isn't able to change the paperwork at the bank to name a new payee. Mark does, however, have a will that contains a residuary clause, naming his daughter Madeline as residuary beneficiary. When Mark dies, and the will is probated, the money in the account goes to her, along with everything else that Mark didn't specifically leave to another beneficiary.
E. If You Change Your Mind
Families change; relationships change. At some point you may decide that you don't want to leave money to a P.O.D. payee you've named, or a beneficiary may die before you do. You're free to change the P.O.D. arrangement, but you must meticulously follow the procedures for making changes. The law books, sadly, are full of cases brought by relatives fighting over the bank accounts of their deceased loved ones who didn't pay enough attention to these simple rules.
1. How to Change a P.O.D. Designation There are two easy and foolproof ways to make a change to a P.O.D. account:
Withdraw the money in the account; or
Go to the bank and change the paperwork. Fill out, sign and deliver to the bank a new account registration card that names a different beneficiary or removes the P.O.D. designation altogether.
To ensure that your wishes are followed after your death, dot the i's and cross the t's when it comes to following the bank's procedures. A change in beneficiary isn't effective unless you fulfill the bank's requirements, whatever they are. Almost all banks require something in writing-a phone call isn't good enough. And to be effective, in most places your written instructions must be received by the bank before your death. That doesn't sound difficult, but it's not all that unusual to find problems. In one case, after a woman's death a new signature card, in a stamped envelope, was found on her desk. Relatives sued over the money. The court ruled that the change was not effective because the new signature card was ambiguous and because the bank had not received it before her death. (Codispoti v. Mid-America Federal Savings and Loan Ass'n, No. 85AP-451, Ohio App. 1986.)
2. Contradictory Will Provisions
Trying to change a P.O.D. designation in your will, by leaving the account to someone else, is almost certain to cause problems after your death. At best, it will spawn confusion; at worst, disagreements or even a lawsuit. About half the states say, flat out, that a P.O.D. designation cannot be overridden or changed in a will. In these states, a will provision that purports to name a new beneficiary for a P.O.D. account will simply have no effect.
Example: Kimberly, a resident of Washington, names her niece, Patricia, as the P.O.D. beneficiary of her bank account. After they have a falling-out, Kimberly writes her will, and in it leaves the funds in the account to her friend Charles. At Kimberly's death, Patricia is still legally entitled to collect the money.
Don't rely on a property agreement, either. When an Arizona couple divorced, their property settlement agreement gave the husband some bank CDs for which he had named the wife as the payable-on-death payee. But the husband never went to the bank and removed the wife as the P.O.D. payee. When he died, a court ruled that the ex-wife was entitled to the money, because the settlement agreement had no effect on the contract between the husband and the bank. (Jordan v. Burgbacher, 883 P.2d 458 (Ariz. Ct. App. 1994).)
Some other states do allow you to revoke a payable-on-death designation in your will if you specifically identify the account and the beneficiary. An attempt to wipe out several accounts with a general statement won't work. In one case, a South Dakota woman wrote in her will that "I hereby intentionally revoke any joint tenancies or trust arrangements commonly called 'Totten trusts' [another name for P.O.D. accounts] by this will." After her death, a court ruled that even this language wasn't specific enough; state law requires every P.O.D. account to be individually changed or revoked. (In re Estate of Sneed, 521 N.W.2d 675 (S. Dak. 1994).)
The moral: Never rely on your will to change a payable-on-death account. Instead, deal directly with the bank, which, after all, will be in charge of the money after your death.
F. Claiming the Money
After your death, all a P.O.D. beneficiary needs to do to claim the money is show the bank a certified copy of the death certificate and proof of his or her identity. If the account was a joint account to begin with, the bank will need to see the death certificates of all the original owners. The bank records will show that the beneficiary is entitled to whatever money is in the account.
State laws authorize banks to release the money in payable-on-death accounts when they're shown this proof of the account holder's death; they don't need probate court approval. Legally, the money automatically belongs to the beneficiaries when the original account owner dies. It's not under the control of the probate court.
Beneficiaries may, however, encounter some delays when they go to claim the money:
Tax clearances. Like other bank accounts, a payable-on-death account may be temporarily frozen at your death, if your state levies death taxes. The bank will release the money to your beneficiaries when the state is satisfied that your estate has ample funds to pay the taxes. Waiting periods. There may be a short waiting period before the money can be claimed. Vermont, for example, doesn't allow a bank to release funds to P.O.D. beneficiaries until 90 days after the death of the account owner. When you set up a P.O.D. account, ask the bank what the P.O.D. payee will need to do to claim the money after your death. Then make sure the payee knows what to expect.