Before we discuss what happens to payable on death accounts following someone’s passing, let’s define what this process is. A payable on death (POD) account is an instrument that is designed by banks and credit unions. They provide a form for account holders to fill out in order to list beneficiaries who will receive funds upon their passing. These funds are transferred immediately when a death certificate and identification is provided by the beneficiary. These forms are typically filled out as part of the estate planning process.
Payable on death accounts are a popular means for preventing probate. How, exactly, does the payable on death process work?
The process is pretty straight-forward, and simple for the beneficiary to follow. They go to the bank or credit union where the account (or accounts) are held, and fill out some additional forms. At this point, a certified copy of your death certificate and valid identification must be provided. Once these simple steps are followed, the accounts immediately become the beneficiary’s.
This is not a perfect solution, though, and there are some considerations that must be addressed by the payable on death account benficiary:
- Payment of income taxes: Even though the beneficiary receives your pay on death account without incurring any associated fees, there are considerations one must address if this account is interest-bearing. All interest the account earns prior to your passing must be reported on your last income tax return. Following this return, the future interest earnings must be filed by the beneficiary.
- Payment of estate taxes: Your estate planning attorney will alert you to estate taxes that may be owed following your passing. When creating a will, or a living trust, these instruments outline if the beneficiary of the payable on death account is required to use a portion of those funds to cover the estate tax bill. If you do not have wills and trusts, the state in which you reside will handle how these taxes are paid and by whom.
Estate planning and avoiding probate are two tricky processes, but essential overall. Adding payable upon death accounts not only ensures staying out of probate court, but it helps distribute your assets efficiently and without hassle. Confer with your estate planning lawyer about additional ways you can avoid probate, as well as additional ways to reduce estate taxes. Remember, creating a will does not guarantee you will not go into probate following your passing.