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Payable on Death Account vs. Transfer on Death Account

Byline profile imageEdited by Patrick Villanova, CEPF®
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Byline profile imageEdited by Arturo Conde, CEPF®
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Payable on death (POD) and transfer on death (TOD) accounts both streamline the transfer of assets when an account holder dies. Assets held in POD and TOD accounts bypass the onerous probate process and instead pass directly to the named beneficiary. Despite their similar names and purposes, there is a key difference. The POD designation only applies to bank accounts, certificates of deposit (CDs) and savings bonds. Meanwhile, TODs apply to investment accounts and other assets.

A financial advisor can answer your questions about estate and legacy planning.

What Is a Payable on Death Account?

A payable on death (POD) account eases the process of estate planning. In essence, a POD account is a bank account with a designated beneficiary. This person will inherit the funds in the account upon the account holder’s death.

Also known as Totten trusts, POD accounts avoid probate. This long and costly legal process validates a person’s will and distributes their assets under court supervision. There’s also no guarantee the court’s decision would honor your final wishes.

One of the key characteristics of a POD account is its adaptability. You can designate a wide range of account types and holdings as POD accounts, including:

What Is a Transfer on Death Account?

A couple goes over their beneficiary designations with an estate planning attorney.

Transfer on death (TOD) accounts can easily be confused with POD accounts. While both facilitate the transfer of assets upon the account holder’s death, they hold distinct types of assets. POD accounts typically hold bank account funds, TOD accounts primarily contain securities and investment accounts.

For instance, assets like stocks, mutual funds and exchange-traded funds (ETFs) might reside in a TOD account. POD accounts primarily hold savings or checking account funds. Beyond this distinction, POD and TOD accounts are quite similar.

What Other Assets Can Have TOD Designations?

Moving beyond the standard TOD accounts for securities and investment accounts, other types of assets can also carry TOD designations. These encompass real estate and vehicles, known as transfer on death deeds and transfer on death titles for vehicles, respectively. Like TOD accounts, these designations aim to facilitate a direct transfer to designated beneficiaries and bypass probate.

However, it is important to remember that TOD account rules and regulations vary by state. Seek legal advice or conduct comprehensive state-specific research before establishing a TOD account or designation. Understanding the specific regulations in your state can help avert potential legal complications and facilitate a smoother transfer of assets.

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How to Add POD and TOD Designations

Understanding how to add POD and TOD designations to your accounts helps ensure a smoother transfer of assets after your passing.

First, contact your bank or brokerage firm to inquire about adding POD or TOD designations. These financial institutions usually provide specific forms for this purpose, typically titled “POD designation form” or “TOD designation form.” You’ll need the full legal name, address, and Social Security number or tax ID number of the beneficiary.

Once these forms are completed, they should be returned to the bank or brokerage firm. In turn, the institution will update your account information with the new POD or TOD designations. This legally binds the asset transfer upon your death.

The process of designating POD or TOD is not without legal considerations and regulations. Generally, anyone can be named as a beneficiary for a POD or TOD account, including minors, non-U.S. citizens and organizations.

However, the beneficiaries have certain responsibilities. For example, they must provide a certified copy of the deceased’s death certificate to facilitate the transfer of assets.

POD vs. TOD Accounts: Key Differences

While POD and TOD accounts serve the same purpose of avoiding probate, they apply to different types of assets. POD accounts are used exclusively for bank-related assets, such as checking accounts, savings accounts, certificates of deposit (CDs) and savings bonds. In contrast, TOD accounts cover investment-related assets, including stocks, mutual funds, ETFs, and brokerage accounts.

Another key distinction is that TOD designations extend beyond financial accounts. In some states, real estate and vehicles can carry a TOD designation, allowing them to pass directly to a beneficiary. POD accounts do not have this flexibility. Despite these differences, both options provide a straightforward, cost-effective method for estate planning by ensuring assets transfer directly to beneficiaries without the delays of probate.

Pros and Cons of POD and TOD Accounts

Designating beneficiaries of POD and TOD accounts can make things a little easier for your heirs when you pass away. However, there are some drawbacks and shortfalls of using these accounts for estate planning. Here’s a look at the pros and cons of POD and TOD accounts.

Pros

  • Avoids probate: By avoiding probate, POD and TOD accounts streamline the distribution of assets post-death, allowing beneficiaries to gain access to these funds with greater speed.
  • Simplicity: Setting up these accounts is generally straightforward, often requiring just the completion of a form at the bank or brokerage firm.
  • No additional cost: There’s usually no cost to establish these accounts, aligning with the needs of individuals seeking a cost-effective method of transferring assets.

Cons

  • Joint ownership complexity. When an account is jointly owned, the beneficiary of the account won’t receive the assets until the surviving owner(s) die. The same applies to accounts owned in states with tenancy by the entirety for married couples.
  • Naming alternative beneficiaries: These accounts do not allow for the nomination of alternative beneficiaries if the primary beneficiary or beneficiaries predecease the account owner. This could lead to the assets being subjected to probate if the primary beneficiary dies first.
  • Transfers only happen after death: These accounts stipulate that the person must pass away before the beneficiary can access the funds – a restriction that could prove troublesome if the beneficiary requires access to these assets during the account holder’s life or if the account owner becomes incapacitated during their lifetime.

When POD and TOD Designations Can Pose Conflicts With Wills

A POD or TOD designation is a legally binding instruction that operates independently from your will. If your will says one thing and your beneficiary designation says another, the designation wins every time. Courts have upheld this principle repeatedly, and executors have no authority to redirect those assets regardless of what the will states. This catches families off guard more often than most estate attorneys would like to admit.

The most common scenario involves outdated designations after a major life change. Someone gets divorced and updates their will to remove their ex-spouse and assumes the job is done. But the TOD designation on their brokerage account still lists the former partner, and because no one thought to update it, that account goes directly to the ex upon death. Remarriage, estrangement from a child, the birth of a new grandchild — any of these can create a mismatch between what you intend and what your designations actually say.

This problem gets worse when multiple estate planning tools are in play. A person might establish a living trust, pour most of their assets into it and assume everything is covered. But if a bank account still carries a POD designation naming someone outside the trust, that account bypasses the trust entirely. The trustee has no claim to it. The result is a distribution that doesn’t match the plan the person spent time and money putting together.

Long-term Planning

Reviewing your designations should be a regular habit, not a one-time task. Every time you update a will or trust, go through each account that carries a POD or TOD designation and confirm the beneficiary information still reflects your wishes. Keep a written record of every designation, including the institution, account number, and named beneficiary. This list should live alongside your estate documents so your executor or trustee knows exactly what exists and where.

It is also worth naming contingent beneficiaries wherever the institution allows it. If your primary beneficiary predeceases you without a contingency in place that account may end up in probate anyway, defeating the entire purpose of the designation. A few minutes spent filling out the contingent beneficiary line can save your heirs months of legal proceedings and thousands of dollars in court costs.

Bottom Line

Probate avoidance is the primary benefit of payable on death (POD) and transfer on death (TOD) accounts.

Payable on death (POD) and transfer on death (TOD) accounts are effective estate planning tools designed to simplify the transfer of assets upon the account holder’s death by bypassing the probate process. POD and TOD provide flexibility and control, allowing for savings accounts and investment portfolios to transfer seamlessly to a named beneficiary.

Estate Planning Tips

  • If you’re focused on avoiding probate, there are several estate planning strategies that you can employ to keep your assets out of this court-supervised process. Transferring assets to a living trust while you’re alive is one way to bypass probate, but it’s not the only approach that may work for you.
  • It’s important to enlist the help of professionals when you need it. A financial advisor with estate planning expertise may be able to guide you through this process. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.

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