POD? TOD? OMG! What’s the difference? When should they be used?

What I’m referring to are the two primary types of beneficiary designations for certain types of accounts, namely Payable-on-Death (POD) and Transfer-on-Death (TOD) designations.

Adding a (POD) or (TOD) designation to an account allows one’s assets (money and property) in that account to be passed to a named beneficiary when the original account owner dies. These types of accounts, very much like a Trust, avoid the probate process and this can save your heirs the time and expense of a lengthy process that could leave your estate unnecessarily exposed.

With a POD designation, the account assets are transferred to a beneficiary (or beneficiaries) after the account holder’s death. A TOD designation, on the other hand, transfers account ownership to a beneficiary. For example, POD designations can be added to bank accounts, savings accounts, CDs, and money market accounts. TOD designations apply to assets like investment accounts, brokerage accounts, and other accounts holding securities.

These types of designations don’t provide the full range of protections and benefits that a traditional Trust does and can have some unintended consequences.

While POD and TOD designations are fairly easy to establish, avoid the probate process, and leave the account holder in control of the assets during her lifetime and capacity, there is no Trustee who manages a POD or TOD account should the account holder become incapacitated. And assets transferred in this way have no protection from a beneficiary’s creditors or poor spending habits. Assets with POD or TOD designations go directly to the beneficiary at the account owner’s passing, without regard to the beneficiary’s capacity to manage the money if that type of protection is needed.

Where joint accounts are concerned, POD or TOD designations don’t kick in until both account owners have passed away. At the passing of the first spouse, the surviving spouse becomes the sole owner of the account – and remember, an account owner has the power to change these designations, so this should also be considered. If you worry about plans being undone at your passing, these types of designations might not provide you with a complete plan for your estate.

Some additional things to consider: If the account holder becomes incapacitated and does not have a power of attorney, relatives will not have permission to access the POD account to use for the account owner’s care. The money will become trapped in the account until the account holder recovers or passes away. And backup beneficiaries generally can’t be named so if one predeceases the account owner, their share could be reallocated to the remaining surviving beneficiaries or subject to probate.

Inconsistencies within an estate plan also have an effect. If a Will is updated but POD or TOD beneficiaries are not, there could be inconsistencies in the overall estate plan. And if there are insufficient probate assets to pay the debts of the estate, creditors may be able to claim certain non-probate assets, including POD and TOD accounts.

While transferring setting up POD and TOD accounts may be as easy, the ease of doing so must be considered alongside fiscal considerations such as taxes and personal considerations such as whether heirs would be better served by placing the accounts in a trust. If I can help parse these things out for you. I’m here.