Payable-on-Death (POD) Accounts: How They Work

A payable-on-death bank account is one of the simplest ways to keep money—even a large amount—out of probate court. All you have to do is tell your bank who should inherit the funds in the account or certificate of deposit. From there, the bank and the person you named handle everything themselves, with no probate court involved at all.

Some people call this setup the "poor man's trust," because a free beneficiary designation on a bank account skips probate just as effectively as a costly, attorney-drafted living trust.

You're allowed to name more than one beneficiary on a POD account. When you do, the money is usually divided evenly among them after you die.

While you're living, the person you've named has no claim on the account whatsoever. You're free to spend the money, swap in a different beneficiary, or close the account entirely if your plans or your relationships change.

• Pros and cons of POD accounts
• Payable-on-death account or trust?
• Extra FDIC coverage for POD accounts
• Rights of creditors and your spouse
• How the beneficiary can claim the money
• How to set up a POD account
• Other ways to avoid probate

Pros and cons of POD accounts

Payable-on-death account or trust?

These accounts carry different labels depending on where you bank. Some institutions hand you paperwork for what's called a "Totten trust" instead of a plain payable-on-death form. You might also hear the terms tentative trust, informal trust, or revocable bank account trust. Some banks label the account "ITF," meaning "in trust for."

Extra FDIC coverage for POD accounts

Adding a payable-on-death designation can also stretch your FDIC insurance at a given bank. Normally, the FDIC insures each person's deposits at one institution up to $250,000. Once your accounts and CDs at that bank add up to $250,000, any additional account you open there in your own name alone won't be covered.

But if you open a second account naming a POD beneficiary, that account gets its own separate $250,000 of coverage—effectively doubling what's protected. In fact, an account owner can be insured for up to $250,000 for each distinct primary beneficiary named, up to five beneficiaries, which caps out at $1,250,000 of coverage per bank. You can check your own coverage using the FDIC's Electronic Deposit Insurance Estimator.

Rights of creditors and your spouse

A POD account doesn't let you dodge what you owe. Skipping probate doesn't erase your legal obligations, so if your other assets aren't enough to cover debts, taxes, or temporary support for a spouse and minor children, a POD account—like any other asset that bypasses probate—can still be reached by creditors or family members with a legal claim.

Your spouse may also have a stake in the account. In a community property state, your spouse or registered domestic partner likely already owns half of the funds, even if the account sits in your name alone. Money you earned during the marriage, along with any interest it generated, generally counts as community property that you both own. (Money you had before marrying, or received individually as a gift or inheritance, usually stays separate property unless it gets mixed in with community funds.)

If the account holds community property and you'd like to name someone other than your spouse to receive all of it, get your spouse's written sign-off first. Without it, your spouse could later claim half the account after your death, leaving your chosen beneficiary with only a portion of what you intended.

In states that don't follow community property rules, a surviving spouse who feels shortchanged may still be able to pursue a share of money left to someone else. This kind of legal challenge is uncommon, though. The exact rules will depend on your state, so it's worth checking local law if this situation applies to you.

How the beneficiary can claim the money

Until you die, the person you've named has no legal right to the account. Afterward, claiming the funds is simple: your beneficiary just brings a certified death certificate and proof of identity to the bank. If the account was originally jointly held, the bank will want death certificates for every original owner. Bank records alone establish the beneficiary's right to the money—no probate court paperwork is needed. Depending on your state, there may be a brief waiting period before the funds can be released.

How to set up a POD account

Turning a regular account into a payable-on-death one—or opening a new one that way from the start—just means filling out a beneficiary form at your bank, often available online.

Many account types offer this option, including:

• checking accounts
• savings accounts
• certificates of deposit (CDs)
• individual retirement accounts (IRAs), and
• investment accounts.

Unlike a lot of legal paperwork, these forms are straightforward. If anything on the form confuses you, your bank should be able to walk you through it.

Other ways to avoid probate

If you'd like to explore additional probate-avoidance strategies, the book 8 Ways to Avoid Probate, by Mary Randolph, covers several other options worth considering.