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What is a TOD or POD account? What are their disadvantages?

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A financial advisor friend of mine had a client who owns a transfer on death account for her adult son. Her son is not in a position to be financially responsible for the funds at this point, but the funds are ultimately intended to go to him. The client wanted to know whether to keep the funds in the transfer on death account or whether she should move the account to a trust for her son’s benefit.

After a brief discussion with the financial advisor, we decided to move the account to a trust for her son’s benefit.

This blog article explains why.

But, first…

WHAT ARE TOD AND POD ACCOUNTS?

TOD and POD accounts sound like an amazing estate planning tool because you can avoid probate by placing these designations on each of your financial accounts.

TOD stands for “transfer on death,” and is another designation that you can add to a financial account. Like a POD, upon your death, the ownership of the account will be transferred to the designated individual if the individual is an adult who is still living and who is not incapacitated at the time of your death. The account will transfer to the individual named as the TOD without the necessity of probate.

POD stands for “payable on death,” and is a designation that you can add to a financial account instructing the financial institution to pay the funds in the account to an individual at the time of your death. If the individual is an adult who is still living and who is not incapacitated at the time of your death, the funds in the account will be paid to him or her without the necessity of probate.

WHAT ARE THE DISADVANTAGES OF USING TOD AND POD ACCOUNTS?

However, while TOD and POD accounts may avoid probate for a specific asset, there are several disadvantages of using TOD and POD accounts in your estate planning strategy.

• The TOD and POD predeceases you – If you name someone as a TOD and POD but that person dies before you and you fail to update the designation, the account must be probated.

• You become incapacitated – TOD and POD accounts only transfer upon your death. If you become incapacitated and do not have a power of attorney to manage your finances, the account may fall into a conservatorship. In some cases, the financial institution will not accept the power of attorney and your agent will be forced to litigate the matter in court. Because TOD and POD accounts only transfer upon your death, if you are incapacitated you have no say in how those accounts are managed if the TOD and POD designation is modified or removed.

• TOD and POD accounts for minors – If you designate a minor as the TOD and POD and you die before the minor is 18 years old, the legal guardians of the child must petition the court for conservatorship over the account. This can be a costly and time-consuming endeavor that will continue until the child reaches 18, when the account can be transferred to him or her.

• The TOD or POD becomes disabled – If your TOD or POD is disabled when you die, receiving this account may interfere with the person receiving disability benefits.

A TRUST IS A BETTER OPTION

Because there are so many issues that can arise when using TOD and POD accounts to avoid, delay or decrease the cost of probate, they are not the best estate planning tools you can use to accomplish your goals. A trust will accomplish your estate planning goals without the risks associated with TOD and POD accounts.

If you currently have a TOD or POD account, or are thinking of opening a TOD or POD account, and would like to discuss the option of creating a trust instead, please feel free to call me at (405) 254-5005.

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