PODs and TODs: To Sign or Not to Sign?

Pay on death (PODs) and transfers on death (TODs) can be helpful to a lot of families if used consistently with their estate plan. A POD is a beneficiary designation used by bankers for your bank accounts. It is a contract provision telling the bank to pay the amount in your account to someone (the beneficiary) when you pass away. A TOD is a similar tool that is used by financial institutions for investment accounts. It designates a beneficiary to receive payments from the investment after you pass away. They both avoid probate. On the surface, PODs and TODs seem helpful. But is signing a POD or TOD a good idea for your estate plan?

The answer depends on whether you have a sophisticated retirement plan already in place or unusual circumstances in your family. A POD or TOD can soil any good estate plan. Banks are pushing POD signings, recommending them to clients as a means of saving money on probate; probate ties up assets for months and can be expensive. Unfortunately, bankers don’t take into account the family’s estate plans or retirement interests. This is significant because designated beneficiaries always trump your Last Will and Testament. If the POD or TOD is inconsistent with your estate plan, money in that account is removed from your trust and cannot be distributed as wished in your Will or Trust.

For example, Jack and Diane are an elderly couple who have been married for many years with three children. Diane required nursing care and, with the help of an elder law attorney, qualified for Medicaid. The couple’s attorney created an estate plan which moved the couple’s assets to Jack and created a trust to protect both the husband and the wife. In the event Jack passed away before his wife, the trust protected all of their property while allowing Diane to stay on Medicaid. With this plan there would be no estate recovery. However, Jack’s banker suggested signing a POD so that, if Jack passed away before his wife, the bank could give the money to Diane outside of probate. Bankers are trusted advisors and Jack got confused about his plans and signed the POD not realizing it would take his money out of the trust. After Jack passed away, Diane received over $300,000 from the bank account as beneficiary of the POD. As a result, Diane was removed from Medicaid and her family ended up losing over $100,000 before she could qualify for Medicaid again. Here, the banker had no clue his advice was against Jack and Diane’s interest and did not ask about the couple’s estate plan. It was a horrible decision that led to terrible results.

In essence, PODs and TODs are exactly the same: they are both beneficiary designations. The key takeaway is that beneficiary designations of any kind (whether it be for an IRA, life insurance, 401k, or annuities) are an important part of your overall plan. Part of your estate planning should consider what your beneficiary designations are and if they are consistent with your plans. If used correctly, PODs and TODs can be helpful. Talk to an attorney before you sign and make sure it is completely consistent with your plans, both foreseeable and unforeseeable. Our lives change as we grow older, sometimes in unexpected ways. Wills and trusts take contingencies and the unexpected things in life into account, but an inconsistent POD or TOD can tear up even a good estate plan.

If you have questions about Elder law, asset protection or retirement planning, consider W.G. Alexander & Associates – we are experienced attorneys who offer a unique blend of asset protection, Elder Law and estate planning. You can also attend our free seminars. Learn more through our website at www.wgalaw.com, or call us at (919) 256-7000.

Attorney Bill Alexander of W. G. Alexander & Associates discusses these issues and more every Saturday morning on his radio program, “Asset Protection Today,” on TalkRadio 680 WPTF (AM). Be sure to listen from 11:00 AM – 12:00 PM.