The Perils of PODS

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The Perils of PODS


Payable on Death accounts, or PODs, are growing increasingly popular as estate planning tools. Life insurance policies are the best known kind of POD asset, but you call also specify POD beneficiaries on annuities, certificates of deposit, stocks and bonds, US savings bonds, and some other assets. Recently, the Indiana state legislature also made it legal to transfer some real estate at death with a POD designation.

People are drawn to PODs because they allow transfer of property without writing a will and because they may help heirs avoid probate. POD accounts are appropriate in some situations. Keep in mind, though, that in the estate planning tool-box, PODs are blunt instruments. Here are five perils of PODs:

  1. Conflict with an existing estate plan. If you have already drawn up a will and then later designate most, or all of your assets as POD, keep in mind that POD assets are not treated as probate assets and are not controlled by your will. Your will may have standard language instructing that taxes and administrative costs be paid from your estate but the estate may have no funds with which to pay those obligations, leading to confusion or conflict among your heirs.
  2. Unexpected consequences. When you nominate beneficiaries on a POD account, be aware that unless careful provisions are made, a given beneficiary’s share in the asset will lapse if he or she predeceases the asset’s owner. For example: a parent has three children, all three of whom have children of their own. If she makes her assets POD to the three children, and one child predeceases her, those assets will be split between her two living children. Nothing will go to the children of the deceased child unless the POD account specifically names them as contingent beneficiaries.
  3. Unequal distributions. You may intend to leave equal shares to your heirs, but if you make various assets POD to various heirs over an extended period of time, it may be difficult to keep distributions equal.
  4. Minors and inheritances. If you leave POD accounts directly to minors, be aware that by Indiana law, if the minor is supposed to receive any one asset or share of an asset worth more than $10,000, a guardian may have to be appointed by the court to receive the asset.
  5. Tax confusion. Indiana Inheritance Tax and Federal Estate Tax is levied on transfers at death, whether through a will (probate) or through POD accounts, if the amounts transferred exceed the exemptions for a given heir. Unless a will or trust exists that specifies otherwise, each beneficiary will be expected to pay the taxes owed on his or her share. PODs can help heirs avoid the probate process, but they do not help heirs avoid taxes.

POD accounts are certainly useful in some situations. Just keep in mind that if employed improperly, POD accounts can cost more time, expense, and trouble than taking an estate through probate.