Pay on Death Accounts: Proceed with Caution

writingcheckFor the past fourteen years, Massachusetts has allowed owners of brokerage accounts and stocks and bonds to add a “pay on death” (POD) or “transfer on death” (TOD) beneficiary designation to their accounts and securities.  The POD beneficiary designation causes the account assets to pass automatically to the named beneficiary upon the death of the account owner regardless of what the owner’s will might otherwise provide.  Even better, the account does not have to pass through probate.

What could be simpler, or better, you might ask? Well, what at first blush appears to be a good idea can lead to some unintended and oftentimes adverse consequences to the account owner unless the designation is used carefully.

First, many clients have trouble remembering if they have designated a POD beneficiary for their investment accounts and in many cases the beneficiary named is not coordinated with the terms of the owner’s estate planning documents.  Therefore, it is important to verify and review your POD designations periodically with your advisors since they often do not appear on the brokerage house investment statements (unlike a joint account, where the name of the other joint owner appears on the statement).

Second, POD designations can undermine the tax and asset management benefits of any revocable trusts that a client has created.  Most trusts are designed with the expectation that they will hold and manage all of the client’s assets upon the client’s death, but the POD account assets will pass directly to the named beneficiary.

Third, the POD designation may cause inequitable results among the client’s intended beneficiaries if the POD beneficiary also is named as one of the beneficiaries of the client’s will or trust.  The POD beneficiary will receive a share of the assets passing under the client’s will or trust in addition to receiving all of the assets governed by the POD beneficiary designation.  In the case of a client who has established a trust, the client could avoid this inequitable result by either (1) naming his trust as the POD beneficiary of his investment accounts so that the trust governs the disposition of all of his assets or (2) transferring title to his investment assets directly to his trust before his death.  Both approaches enable the client to avoid probate and ensure a more equitable distribution of assets among his intended beneficiaries.

Finally, a POD designation may lead to unfair results in terms of who is responsible for the payment of the account owner’s final debts and expenses and estate taxes.  Typically, a will assigns this responsibility solely to the assets passing under the owner’s will.  Should some of this responsibility be borne by the POD beneficiary?  If so, you need to make sure that the tax allocation provisions of your will are coordinated with your POD beneficiary designations.

In short, POD beneficiary designations can be useful in the right circumstances, but need to be reviewed in the context of your overall estate plan.

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About Andy O'Donnell

Andy is a partner of the firm, practicing in the areas of tax law and estate and business planning. He is the former chair of the Trusts and Estates Group, and he currently serves as a member of the Management Committee.
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