TOD and POD Accounts: What’s the Difference?

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A TOD account allows the account holder to name a beneficiary on a non-retirement financial account to receive assets at the time of the account holder’s death, thereby (generally – i.e., when used correctly) avoiding probate.

Kiplinger’s recent article entitled “TOD Accounts Versus Revocable Trusts – Which Is Better?” explains that a TOD (“transfer on death”) account typically deals with distributing stocks, brokerage accounts or bonds to the named beneficiary, when the account holder dies. A POD (“payable on death”) account is similar to a TOD account. However, it handles a person’s bank assets (cash), not their securities.

Both TOD and POD accounts are quick and simple ways of avoiding a probate process that can be slow, expensive, public and at times messy. Financial institutions offer TOD and POD at their discretion, but almost all major brokerage houses and investment houses now have these types of accounts, as well as most banks for standard bank accounts. Many even let you handle this online.

The big benefit of using a POD or TOD account is probate avoidance. As mentioned, TOD and POD accounts avoid the probate process, by naming a beneficiary or beneficiaries to inherit the asset directly when the account owner passes away. These accounts can distribute assets quickly and seamlessly to the intended beneficiary.

However, when someone passes away, there can be creditors, expenses of administering the decedent’s estate and taxes owed. The person or persons responsible for administering the decedent’s estate are typically empowered under the law to seek contributions from the POD and TOD beneficiaries to pay those liabilities. If the beneficiaries don’t contribute voluntarily, there may be no choice but to file a lawsuit to obtain the contributions. The beneficiary may also have spent those assets or have other circumstances, such as involvement in a lawsuit or a divorce. Consequently, these situations will complicate turning over those assets.

A trust lets you to plan for incapacity, and if the creator of the trust becomes incapacitated, a successor or co-trustee can assume management of the account for the benefit of the creator. With a POD or TOD account, a durable power of attorney would be required to have another person handle the account. Note that financial institutions can be reluctant to accept powers of attorney, if the documents are old or don’t have the appropriate language.

A trust allows you to plan for your beneficiaries, and if your beneficiaries are minors, have special needs, have creditor issues, or have mental health or substance abuse issues, trusts can hold and manage assets to protect those assets for the beneficiary’s use. Inheritances can also be managed over long periods of time with a trust.

Although in some cases POD and TOD accounts can be appropriate for probate avoidance, their limitations at addressing other issues can cause many individuals to opt for a revocable trust. Talk to an experienced estate planning attorney to see what’s best for you and your family.

Reference: Kiplinger (Dec. 2, 2021) “TOD Accounts Versus Revocable Trusts – Which Is Better?”