PODs and TODs: To Sign or Not to Sign?
Are “Pay on Death” Designations a Good Idea for Your Estate Plan?
When you open a bank or investment account, you may be encouraged to sign a form that adds a “Pay on Death” (POD) or “Transfer on Death” (TOD) designation. These are simple beneficiary designations that allow the funds in the account to pass directly to a named person upon your death, avoiding the probate process.
On the surface, this seems like a helpful and cost-effective tool. However, using these designations without understanding how they interact with your overall estate plan can have disastrous consequences.
The Hidden Danger: Beneficiary Designations Override Your Will and Trust
This is the most critical point to understand: a POD or TOD is a contract between you and the financial institution that completely overrides any instructions in your Last Will and Testament or Revocable Living Trust. If your will leaves everything to your three children equally, but your largest bank account has a POD naming only one child, that one child will receive all the money in that account, regardless of what your will says.
A Real-World Example of a Planning Disaster
Consider Jack and Diane, a couple who worked with an attorney to create a sophisticated trust plan. The plan was designed to protect their assets while allowing Diane, who needed nursing care, to maintain her Medicaid eligibility. After the plan was in place, a well-meaning banker advised Jack to add a POD designation to his large bank account, naming Diane as the beneficiary to “avoid probate.”
When Jack passed away, the POD overrode the trust. The money went directly to Diane, disqualifying her from Medicaid. Her family lost over $100,000 to the nursing home before she could re-qualify. The banker’s simple advice, given without knowledge of the couple’s plan, destroyed their financial security.
All Beneficiary Designations Must Be Coordinated
The issue is not unique to PODs and TODs. All beneficiary designations—including those on life insurance policies, annuities, and retirement accounts—operate outside of your will. A comprehensive estate plan involves a thorough review of every single beneficiary designation to ensure they are all consistent with your overall wishes.
The Bottom Line: Consult Before You Sign
POD and TOD designations can be useful tools, but only when they are used correctly as part of a coordinated plan. Never sign one of these forms without understanding how it will affect your family and your long-term goals. A mistake can undo even the most carefully crafted life care plan.
If you have questions about how to properly title your assets or coordinate your beneficiary designations, our experienced attorneys can help. Call our office at (919) 256-7000 to schedule a consultation.