Before we begin, let’s talk about what a pay on death account is (otherwise referred to as POD). These don’t need to be just checking or savings accounts, mind you; they can also be retirement plans, stocks, bonds, securities and pensions. These designated accounts act as a probate avoidance tool.
It is simple to set up pay on death accounts. In most cases, all you have to do is fill out a form provided by where the accounts are held. Then, when you pass away, your beneficiary just has to present their identification and your death certificate in order to obtain what is designated to them.
Unlike some other forms of probate avoidance, POD accounts provide complete control of all assets in your name for the rest of your life, and you are able to make all deemed necessary changes to the beneficiary or beneficiaries. There are no spending limits on POD accounts attached to checking and savings bank account, and you are able to use funds as needed.
There are penalty restrictions for early withdrawals on accounts like IRAs, CDs and 401(k)s, as most of us may already know. However, this restriction is lifted for POD accounts. If you pass away prior to the designated time frame on said account, your designee does not have to pay the penalty for early withdrawal.
Another form of a pay on death account is life insurance. These benefits are paid in cash to the beneficiaries listed on the policy. Typically, these funds are used to pay debts you may still owe at the time of your passing, as well as handling dependent care. Keep in mind that there are several types of life insurance including universal, term and whole life policies.
Setting up pay on death accounts is an important step during the estate planning process. Confer with your estate planning attorney when creating a will, as well as creating a trust. All of these puzzles pieces fit neatly together when you have the proper legal guidance. However, if you attempt to work through this process on your own, it is possible mistakes will occur. During the process, request information about estate taxes and inheritance taxes in order to understand the entire picture and what everyone involved can expect.