Difference Between Transfer on Death and Payable on Death Designation

what is the difference between payable on death vs transfer on death accounts?

Adding a payable on death (POD) or transfer on death (TOD) designation to an account allows the assets (money and property) in that account to be passed to a named beneficiary when the original account holder dies. But what is the difference between payable on death vs transfer on death accounts?

Like trusts, POD and TOD accounts bypass probate. They are also fast, easy, and usually free to set up. However, they do not provide the full range of benefits that a traditional trust does and can have some unintended consequences.

Before deciding whether to set up a POD or TOD account, it is important to know the difference between them, understand their pros and cons, and talk to an attorney about how they fit into your estate planning goals.

Payable on Death vs Transfer on Death (versus a Trust)

Payable on death and transfer on death sound ominous; and while the topic of death is always somewhat gloomy, POD and TOD are estate planning terms that financial account holders should be familiar with.

A goal of most estate plans is to avoid probate—the legal process by which an estate is settled. Probate can be time-consuming and costly, but there are ways to avoid it, such as placing assets in trusts that pass outside of probate.

Another way to avoid probate is to use POD and TOD accounts for asset transfers. The major difference between payable on death vs transfer on death accounts is the type of assets held in the account.

Payable on death (POD) is a designation added to a bank account, such as a checking account, savings account, certificate of deposit (CD), and money market account.
Transfer on death (TOD) applies to an investment account, such as an individual retirement account, 401(k), brokerage account, and other accounts holding securities.

An additional difference between payable on death vs transfer on death accounts is that, with a POD designation, the account assets are transferred to a beneficiary (or beneficiaries), while with a TOD designation, account ownership transfers to a beneficiary.

Financial institutions may refer to a POD account as a Totten trust, a type of revocable trust (aka a living trust) that is set up as a POD account. PODs and TODs are, like Totten trusts, able to be revoked during the owner’s lifetime; that is, the POD or TOD designation can be removed up until the owner passes away. And with all three, while the owner is alive, they retain account ownership and can manage the account as they see fit. It is only when the owner dies that the beneficiaries have a claim to a TOD, POD, or revocable trust.

However, unlike a Totten trust or a revocable trust, there is no trustee who manages a POD or TOD account. The POD or TOD account or assets transfer directly to the beneficiary. Assets transferred in this way have no protection from a beneficiary’s creditors or their poor spending habits.

Pros and Cons of PODs and TODs

It is important to note that, in the case of jointly held accounts, a POD or TOD account designation does not kick in until both account holders have passed away. For example, if spouses jointly own a bank account that is set up as a POD account, the surviving spouse becomes the sole owner of the account when the first spouse dies, and it only passes to named beneficiaries after the surviving spouse dies.

Others benefits may include the following:

Setup is straightforward and there is generally no cost.
Designated beneficiaries receive the funds without having to wait for probate to conclude, which can take months. A POD or TOD account allows loved ones to get money almost immediately. Typically, all they need to provide is the death certificate and identification to the account-holding institution.
A bank account has Federal Deposit Insurance Corporation (FDIC) insurance up to the standard $250,000, but banks allow account owners to specify multiple unique beneficiaries for an informal revocable trust (i.e., a POD account), which provides additional FDIC coverage.^[1]
The account owner has the flexibility to change, add, or revoke a beneficiary designation.
For added flexibility, a durable power of attorney can be added to a POD or TOD account, allowing somebody other than the beneficiary to handle the account.
Trusts can also be named POD beneficiaries.^[2]

The probate avoidance offered by a POD or TOD account is its main appeal, but this and other benefits should be weighed against the following potential pitfalls:

A POD or TOD account is not effective if the owner becomes incapacitated.
Backup beneficiaries cannot be named, so if a beneficiary predeceases the account owner, their share of the account could be automatically reallocated to the remaining surviving beneficiaries or subject to probate.
POD and TOD accounts are established through a financial institution and outside the rest of the estate plan. If a will is updated but POD or TOD beneficiaries are not, there could be inconsistencies in the overall estate plan.
Because POD bank accounts avoid probate and pass outside of the estate, the funds in them are not available to settle claims or debts of the estate, such as estate taxes. This can make things harder on the executor, who may need to ask for voluntary contributions from a POD beneficiary.
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.

Is a Payable on Death vs Transfer on Death Account Right for My Estate Plan?

An estate plan is a highly individual matter that reflects your personal wishes and family dynamics. As such, there is no “one size fits all” advice for an estate plan. The pros and cons of any estate planning vehicle—be it a POD, TOD, revocable trust, will, or power of attorney—must be weighed against your values and goals.

Transferring a bank account to a POD account, or an investment account to a TOD account, may be as easy as signing a document with your financial institution. But the ease of a POD or TOD designation 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.

During a meeting with our estate planning attorney, we can discuss POD and TOD accounts and how they may align with your overarching estate planning objectives. Call Andre O. McDonald, a knowledgeable Howard County, Montgomery County and District of Columbia estate planning, special-needs planning and Medicaid planning attorney, at (443) 741-1088; (301) 941-7809 or (202) 640-2133 to start planning today.

DISCLAIMER: THE INFORMATION POSTED ON THIS BLOG IS INTENDED FOR EDUCATIONAL PURPOSES ONLY AND IS NOT INTENDED TO CONVEY LEGAL, INSURANCE OR TAX ADVICE.

[1] Your Insured Deposits, FDIC (Oct. 27, 2015), https://www.fdic.gov/regulations/resources/brochures/your_insured_deposits-english.html.

[2] Beneficiary FAQs, Bank of America, https://www.bankofamerica.com/deposits/beneficiaries-faqs/ (last visited July 21, 2023).