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The Pitfalls of using "POD" Accounts to Avoid Probate

Many people use "POD" accounts (that stands for "Payable on Death," also called "TOC" or "Transfer on Death" accounts) to avoid probate upon their death. It is a simple legal devise, and completely effective. If you instruct your bank or... 

credit union to designate your account as "POD to John Smith," then when you pass away, John Smith has only to go to the bank with your death certificate, show his identification, and collect the balance in your account. It's simple and effective, as long as everything goes according to plan. But there are some problems and pitfalls to consider. First of all, it will not work unless John Smith knows about the account, and knows that he is named the beneficiary (i.e., the person named to receive the account after your death.) So you need to be sure that John Smith has the information that he needs. Second, some people rely on this to distribute the account to two or more children. They name John Smith as the beneficiary, and they are confident that John knows he is supposed to split it with his brother and sister. Fine. But what if John Smith decides not to. What if he has a dispute with his sister, and claims that she owes him money because he helped her with some expenses several years ago. She may not receive her share of your account, as you intended. Third, if the account balance is large, there may be a tax issue. Whatever money John gives to his brother and sister is technically a gift, because there is no legal requirement that he give them that money. If he gives them more than $14,000 in one year, he is required to file a gift tax return. (There will most likely be no gift tax due, but a return must still be filed.) Fourth, as soon as you pass away, John Smith is entitled to the money. If he has any debt problems, or if he owes anybody any money, that money may be subject to the claims of his creditors, even the portion that was intended to go to your other children. Finally, what happens if John has passed away before you (or at the same time, such as in a car accident)? The money will go to his estate, and will be distributed to his heirs. So the account that you intended to go to your three children may end up in the hands of John's surviving wife, or his children. Of course, more likely than not, none of these situations will develop in your family. But they have all occurred in other families, and I'll wager that in every case, the account owner said, "That won't happen in my family." 

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