Ask Liz Weston

Get smart with your money

POD

Q&A: A follow-up question about payable on death accounts

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Dear Liz: I’ve worked for various broker dealers for 33 years and have never heard of a “payable on death” account. Did you mean transfer on death (TOD) in your previous column?

Answer: I did not.

Payable on death accounts are similar to transfer on death accounts since both allow owners to designate beneficiaries and avoid probate, the court process that otherwise follows death. But the two accounts are meant for different types of assets. Bank accounts use the payable on death designation, while investment accounts are transfer on death. Some states have transfer on death registration for vehicles and transfer on death deeds for real estate.

Q&A: More on payable-on-death accounts

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Dear Liz: You recently wrote about payable-on-death accounts. You wrote that one of the disadvantages to these accounts is that an estate’s executor might have to try to get money back from beneficiaries or pay expenses out of their own pocket if there wasn’t enough money left in the estate to pay the bills. I thought your bills would have to be paid before any money was distributed. Is that not the case?

Answer: No. Payable-on-death accounts typically go directly to the named beneficiaries. Such accounts avoid probate, the court process that otherwise follows death, so there’s no mechanism to withhold money that might be needed to pay final expenses or other bills.

Furthermore, beneficiary designations usually override the terms of a will or living trust. If you were counting on an account to pay final expenses but forgot you named a beneficiary, your executor probably couldn’t access those funds.

Payable-on-death accounts might be a solution for people with simple situations and too few resources to justify a living trust. For example, you might use a pay-on-death designation if you’re leaving a bank account to an only child and you trust them to use the money to pay your final bills.

Otherwise, you’ll want to discuss your situation with an estate planning attorney and get personalized advice about how best to settle your affairs.