The Dangers of POD and TOD Accounts

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moneyUsing TOD (“Transfer on Death”) accounts, POD (“Pay on Death”) accounts and JTWROS (more on this one below) accounts are a seduction. The prospect of passing assets without documents, executors, courts, and lawyers sounds like a slam-dunk. But they’re dangerous.  So don’t buy the hype.

POD and TOD accounts are like going down a sliding board. You slide out of life and your assets slide, too. Creditors are left by the wayside, but so are the other people whom you meant to get something.  Even if you named these others in your will or trust, they’ll now get nada if everything is POD’d and TOD’d.

“J.T.W.R.O.S.” accounts are similar; the initials stand for “Joint Tenants with Right of Survivorship.” This one is a financial see-saw.  TODs and POD assets go one way: to the name that follows the letters.  A JTRWOS account can go either way — to whichever named person lives longer. So which one’s up and gets it all? Which one’s down and gets nothing? As the See-Saw of Life goes, so do the assets held in JTWROS name.

Now while you’re alive, the other person on a JTWROS account can reach everything in it.  That’s not the case with a TOD or POD account; the other person doesn’t even need to know that the POD or TOD account exists.

“Great stuff,” you think. “I don’t need a living trust, a revocable trust, and certainly not a will.”

But not so fast. ‘Taint so.

Who’s going to pay your last income tax? “Not me,” says the person on the other side of the POD or TOD account.  Who’s going to pay for the funeral? “Not me,” says the POD recipient. Same for bills which need to be paid – like the mortgage.  You think the mortgage holder is not going to foreclose because all the money has flowed out in TOD and POD accounts and nobody’s making the monthly payment?

Then there’s IRS, which has the right to go after assets wherever they land and however they got there. They can even prevail over people who aren’t totally left out.   Example: the persons named in the TOD or POD get the loot, but the persons named in the will – or if there’s no will, under local law – get to pay the estate tax bill.

The real victims of POD and TOD accounts, though — and this happens all the time – are the persons left out. If you TOD or POD an account to one child, the other children get nothing.

Can’t the POD/TOD recipient “do right” and simply redistribute the booty? Nope. If he or she gives away more than $14,000 a year, they have made taxable (and required-to-be-reported-on-a-tax-return) gifts. No tax loophole exists for passing around money you inherited.

So who’s pushing TOD and POD accounts? Try the well-meaning bank employee who, oblivious to your other assets and wishes, says “Oh, don’t worry. Your regular savings account doesn’t have a beneficiary. But you can solve that problem and make sure what’s left doesn’t have to go under your Will, which would save you from –ugh! – probate.”

The sales pitch continues. “Just make your account a ‘TOD’ account.  So what’s left in your account when you die will go automatically to the person you name after the ‘TOD’ initials.”

So if the account read “Moses, TOD Aaron,” Aaron would get was in it when Moses died.

The well-meaning bank employee becomes your hero, right? Don’t start cheering yet.

Or maybe it’s the good-intentioned assistant to your financial planner. Sure, your retirement plan has a beneficiary, and so does your IRA.  But what about your regular portfolio account, the money market account, all that? They don’t have beneficiaries.

“I can take care of that for you,” says the assistant.  “Let’s turn your regular accounts into P.O.D. accounts.  And when you’re gone, everything in your regular account, in the money market, and on every other account that’s not an IRA or a  Qualified Plan —  will go to the person you’ve named.

“Give me an example,” you ask. Says the planner: “Sign there, just below where I printed “Butch Cassidy POD. Sundance Kid.”

The moral of the story: don’t go the TOD or POD routes blithely. Don’t fall for JTWROS because it seems easy. Each of them has consequences. And after you’re gone is not a good time to find out.