Pay on death (POD) designation allows you transfer an account to a beneficiary in the event of your death. POD accounts can come in many forms: bank accounts, stocks and bonds, government securities, vehicle registration, pension plans, and 401(k) plans, to name a few. POD is a relatively simple and hassle free way to avoid probate.
How do Pay on Death Designations work?
Setting up a POD designation is pretty straight forward. For example, in the case of bank accounts it requires filling out a standard form. Upon your death, the beneficiary simply has to present identification and a death certificate to receive the funds in the account.
What are the benefits of Pay on Death Designations?
Besides the easy set-up, POD designations are great because they allow you to maintain control of your assets while you are alive, and allow you to change the beneficiary if that is necessary. In the case of POD bank accounts, you still have the option to spend as much of the money in the account as you need or want to.
Special considerations in Pay on Death Designations
Certain accounts, such as 401(k)s, C.D.s, pensions, and IRAs do not allow the account holder to withdraw the funds in the account before a certain period of time without the account holder first having to pay a penalty. In the case of POD accounts, if the account holder were to die before the time period that would allow free withdrawal of the funds, the funds can be withdrawn by the account beneficiary without penalty. One other option for plans such as these is to name your living trust as the beneficiary, so that the funds may be distributed from your trust by the trustee according to your wishes.
Life insurance is another type of POD account. Life insurance pays cash to your beneficiaries upon your death. This cash can be used to pay off your debts, or to keep dependents financially stable. The kind of life insurance you buy is dependant on your financial situation as well as how many dependents you have. Some life insurance policies, called “term” life insurance, are temporary, and only pay out if you die before a certain time. Other policies called “whole” or “universal” are permanent as long as the premiums are paid, and eventually collect cash value which can be used to produce returns for the policy holder.
Since California recognizes community property, if you pay for your life insurance policy with community property funds then your spouse is legally entitled to half of the proceeds, no matter who is named as the beneficiary of the policy.
There are many different forms that life insurance can take, and it would be best to discuss your options with a trust-worthy life insurance agent. Although life insurance does offer many benefits if the correct policy is used, life insurance on its own is not an effective means of estate planning. It is also important to note that if you name your estate as your life insurance beneficiary, then the proceeds of your policy will have to go through probate. In order to prevent this, you must name a person as your beneficiary.
Another option to avoid probate as well as estate taxes is to create a life insurance trust. With a life insurance trust, you transfer ownership of the life insurance policy to the trust to ensure that the policy remains in effect while you are alive. A life insurance trust prevents an irresponsible beneficiary for either neglecting premium payments or cashing in the policy while you are still alive. There are many conditions which must be met in order for a life insurance trust to be valid and effective. Therefore, it is best to set up this trust with an experienced attorney.