Shortcuts are notorious for unexpected surprises, delays and unintended consequences. And that holds true for using POD (pay-on-death) or TOD (transfer-on-death) instructions as a way to avoid probate. POD, and its cousin, TOD offer a simple way of transferring the account balance at death to the designated beneficiary, but in reality could lead to some unpleasant results.
Using TOD and POD on your bank accounts to avoid probate takes a patchwork approach to estate planning that by definition can’t deal with your entire estate. The common result is that someone gets unintentionally left out.
Your estate will always have some final bills – taxes, ongoing expenses like utilities, and maybe a mortgage. The recipient of TOD or POD funds has no obligation to pay those bills, leaving your other beneficiaries stuck with the estate’s expenses. The beneficiaries named in your will or trust are left holding the bag.
Gift Tax Trap
Sometimes the idea is that the person on the account will “make things right” by distributing the funds to the other intended beneficiaries. The trouble is that they are under no legal obligation to do so, and no duty to disclose what they actually received from the bank. And, if they do follow your wishes, they could face tax consequences for making gifts over $14,000 annually.
Why a Living Trust is a Superior Approach
If a bank account has been properly transferred to a living trust, the next trustee in line is able to step in immediately, and take control of the bank account. But all of the money in the account is still available for use in the estate to ensure no bills are left hanging, and that all of the beneficiaries are treated the way you laid out in your trust.