What Are POD/TOD Designations?
Pay-on-Death (POD) and Transfer-on-Death (TOD) designations allow you to name a beneficiary directly to an account, which can be helpful in controlling the final disposition of an asset upon your death. However, if not used correctly, POD/TODs can easily cause unintended consequences or even defeat an otherwise well-crafted estate plan.
POD/TODs are unique to each individual asset. Most institutions offer them as options for their clients. If an account has a POD/TOD, then at the death of the account holder, the asset is distributed to the person or people designated on the POD/TOD. PODs are “paid”, while TOD assets are “transferred” without being liquidated. The type of account will determine whether the beneficiary designation is considered a POD or a TOD. You cannot have both a POD and a TOD on one account.
How PODs/TODs Can Undermine Your Estate Plan
One significant advantage of POD/TODs is that they allow the asset to bypass probate at the death of the account holder. However, not only do they bypass probate, but they can also invertedly bypass estate planning documents. A POD/TOD designation will control the distribution of that asset at your death, even if your estate planning documents say otherwise. In this way, each POD/TOD effectively functions like a mini estate plan that only applies to one asset.
This mini estate plan has limited options. For example, POD/TODs generally only allow the asset to be distributed outright (i.e. in one lump-sum). There is no option to meter distributions over a period of time, authorize funds only for certain expenses, or place other requirements on the fund’s distribution. If you desire anything other than a one lump-sum delivery, using POD/TODs alone is not an effective strategy for accomplishing your wishes.
Additionally, it can be difficult to keep track of the beneficiaries you have designated on your various accounts, while ensuring that they match your overall wishes. Remember, a POD/TOD designation will control the asset at your death, even if your estate planning documents require something different.
For example, if your estate plan calls for equal distribution between your three children, but only one child is listed as the POD beneficiary of an asset, that one child will receive that asset at your death, to the exclusion of your other two children, in addition to one-third of the remaining estate. Thus, even the soundest estate planning documents can be defeated by an improper POD/TOD designation, often leading to frustration and acrimony between beneficiaries.
For these reasons, we generally do not recommend that our clients utilize POD/TODs as their primary estate planning tool. Rather, we recommend that our clients use these to complement their primary estate planning documents.
Using a Living Trust as Your POD/TOD Beneficiary
For example, if you have a Living Trust as your primary estate planning document, you can name your Living Trust as a POD/TOD beneficiary of your assets. The benefit of doing so is that your Living Trust will control how that asset is distributed to your beneficiaries, e.g., your Living Trust could indicate an outright distribution to two of your children but a metered distribution to one of your children. And if you ever amend your Living Trust, including updating the beneficiaries, you can do so in one centralized place – the Trust itself – without having to update your beneficiary designations on each one of your assets.
For tax-deferred assets, we recommend that our clients consult a financial advisor or accountant to make sure they understand any potential income tax consequences for their beneficiaries from naming a Living Trust as a POD/TOD beneficiary of a tax-deferred asset.
In summary, POD/TOD beneficiary designations can be helpful for avoiding probate and accomplishing your wishes, provided they are used wisely to complement well-crafted estate planning documents.
If you have questions about whether you have properly designated POD/TOD beneficiaries in your estate plan, or if you are ready to create or update your estate plan, contact our office. We would love to answer your questions.