Probate court.
For many people in Ohio engaged in estate planning, helping their beneficiaries avoid the time-consuming process of avoiding these courts is a key priority. That is no surprise—it can often take nine to 18 months to clear probate so your assets are distributed to your beneficiaries, with larger and more complex estates taking even longer.
The desire to avoid that process may lead you toward estate planning vehicles that cut out probate altogether. Payable on death (POD) and Transfer on death (TOD) mechanisms promise to do just that. However, as you will discover, both have disadvantages that can affect the named individuals in these mechanisms.
What Is Payable on Death (POD)?
The Ohio Bar describes a POD as an account owned by a single person – designated as the “owner” – who has named another person, typically called a “beneficiary,” to receive the money in that account upon the owner’s passing. You have options if you wish to create a POD account. Savings and checking accounts are both available, as are accounts opened with credit unions and those opened using a certificate of deposit.
There are several benefits to having a POD account beyond avoiding probate upon your death. For instance, the account still serves you in the same way a regular account would if no beneficiary was named. So, you can withdraw and add money to the account as its “owner” as much as you like, with the account’s contents only transferring to the beneficiary when you die. That beneficiary has no claim to the account before that point – you could even drain it entirely and they would not be able to stop you. You can also change the beneficiary as many times as you like while the account is active and you are still alive. The point here is simple – PODs give you control over your money while allowing you to assign as much (or as little) as you like to the beneficiary named on the account.
The Key POD Disadvantages
PODs are great for the probate avoidance issue, as well as giving you more control over the money you wish to leave behind than a trust might offer. However, there are drawbacks – specifically to your beneficiaries – to keep in mind.
The Will Overriding Issue
The Ohio Bar says that any money stored in a POD account “will not pass under your last will and testament.” That is likely what you want because it means no probate. However, it also means that the POD account overrides any requests you have made in your will – the money in the POD goes to that account’s named individual even if you have specified it should go to somebody else in your will.
For instance, let us assume that you would like to leave all of your cash assets to your child, meaning you name them as a beneficiary in your will. However, you also have a POD account that names your spouse as the beneficiary. In this scenario, your spouse receives all of the money in the POD – even though your will requests otherwise – meaning your final wishes may go unfulfilled. Thus, a POD creates an admin issue. You must change the account’s named beneficiary to match your will, which may be far from the easiest thing to do when you are approaching the end of your life.
It is also worth noting that POD accounts have no backup provisions. If your named beneficiary dies before you, the assets in the account will automatically be transferred to your estate and will thus go through probate. Naming multiple beneficiaries – which is legal in Ohio – can circumvent this issue somewhat, though you may still have to deal with limitations enacted by your bank.
Tax and Creditor Issues
You may believe that having an account that bypasses probate would leave the money in that account safe from your creditors when you die. That may not be the case – Nolo notes that creditors can still make claims against the POD account if the assets that go through probate are not enough to cover your debts.
On the tax side of things, you do not have to worry about the estate tax in Ohio – which was repealed on January 1, 2022. However, high-net-worth individuals may discover that transferring assets via a POD account means their beneficiaries miss out on tax-saving benefits that are provided by alternative forms of estate planning, such as credit shelter and marital trusts.
What Is Transfer on Death (TOD)?
In some ways, a TOD – which may also be called a “Beneficiary deed” – works similarly to a POD. You create a designation to enable you to transfer assets to a beneficiary while avoiding probate. TODs apply to investment accounts or real estate, and the ownership transfers to your beneficiary upon the owner’s death.
The Key TOD Disadvantages
Many of the drawbacks of a TOD mirror the POD disadvantages discussed above. For instance, having the ability to avoid probate does not mean that the assets placed in a TOD are safe from creditors. If the rest of your estate does not cover your debts, a creditor can come for the assets you have attempted to pass on via a TOD. Will conflicts can also occur with a TOD – the account takes priority over your will like a POD account.
Beyond that, the following are more TOD disadvantages to keep in mind.
Lack of Control After Death
While a lack of control is also possible with a POD – you cannot tell a beneficiary what to do with the money left to them – it is perhaps a bigger problem with a TOD. For instance, let us assume you leave a house to your beneficiary through your TOD. You may wish for the person to sell the house upon your passing, with the proceeds being split between them and several others. For instance, you may assign your eldest child as your beneficiary in the belief that they will do what you ask.
The problem is that the TOD beneficiary is under no legal obligation to follow your wishes. Even if you express what you want to happen to the assets passed on via the TOD, the beneficiary is within their legal right to do whatever they want with the assets in the account. After all, they own that entire account when you die.
Take Care When Choosing Estate Planning Options
Both PODs and TODs have clear advantages, not least of which is how they help your beneficiaries avoid probate and how they – on the surface, at least – are simpler than wills and trusts. However, both are far from perfect as estate planning vehicles. If you are not careful, PODs and TODs can create complications with your estate upon your passing, either by overriding your will or by leaving your beneficiaries with the task of dealing with creditors, tax issues, and even the impact on benefits they are receiving.
None of this means that PODs and TODs cannot be helpful accounts to create. You just need to understand exactly what they offer and how they can negatively affect your beneficiaries. That is where Chris Diedling Law can help – our estate planners can help you decide if a POD or TOD is right for you.