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POD and TOD accounts explained

Payable on death (POD) and transfer on death (TOD) accounts are very similar, except that PODs are accounts set up with a bank, while TODs are set up with a brokerage. They both cause assets to sidestep the probate process and pass proceeds directly to the individuals you name in those accounts.

What are the advantages of using a POD or TOD?

There are advantages to these types of accounts:

  • Control: So long as you live, the assets in the accounts belong to you. The named beneficiary has no access to it. You are free to do whatever you please: name someone else to be your beneficiary, spend all the money yourself or shut down the account. In Colorado, you may prepare a TOD deed now but specify that it only takes effect when you die.
  • Ease of use: These accounts are pretty easy to use. All a beneficiary needs to receive his or her benefits is to show the bank an original - not a photocopy - death certificate of the decedent.
  • Tax advantages: The liquidated assets are transferred without incurring any capital gains tax.

Precautionary tips for PODs and TODs

There are a few disadvantages with payable on death and transfer on death accounts. Some can be avoided by knowing the following:

  • Some people forget that they have set up a POD or TOD. The existence of such an account can muddy up an individual's estate plan. If a beneficiary dies or cannot be located and there is no named secondary beneficiary, the assets must go through probate.
  • A POD or TOD cannot be used to avoid paying debts. Legitimate creditors may demand payments from the account. Spouses have rights that cannot be ignored and can also file claims against PODs and TODs.
  • Your POD account is covered by the Federal Deposit Insurance Corporation only to the FDIC limit of $250,000.
  • PODs and TODs can cause problems for minors or adults with disabilities or special needs. If the amount of money crosses a threshold under Medicaid or other benefit programs, they may lose their benefits.

In summary, PODs and TODs are an easy and workable way to keep assets out of probate. But as with most legal matters, nothing is completely easy. Always look to an experienced estate attorney to smooth your way.

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