Payable on Death Bank Accounts: Pros and Cons

Leaving money for loved ones once we have passed on can be a difficult task, especially since many estates end up in probate court. It is no longer as simple as, “I want to leave everything to my daughter”; courts, disputes, creditors and the like tend to make it as difficult as they can to leave money for those who survive you. One of the easiest ways to bypass the confusion and headache is to create a “Payable On Death” bank account, which is also one of the safest ways.

A Payable On Death bank account is a regular bank account that names a specific person as the beneficiary of all funds once the bank account holder dies. All you have to do to set up a Payable On Death bank account is notify the bank as well as the beneficiary of the legal name of the person who you want to inherit the trust. In just one easy step, you avoid probate court and ensure that your loved one will receive the money he or she is due.

Payable on Death bank accounts are often called the “poor man’s trust” because they accomplish the same goals as a lawyer-drawn trust, but for free. You don’t have to pay fees to an attorney for a Payable On Death bank account, but it accomplishes the exact same goals.

With a Payable On Death bank account, the beneficiary has no rights to the funds until you pass on. Until that time, you are free to use the money kept in the bank account, to change the beneficiary, or to close the account. You control everything until you pass on, which leaves many people with peace of mind.

The only real drawback to a Payable On Death bank account is that you cannot name alternate beneficiaries on one account. This can easily be overcome by setting up multiple Payable On Death bank accounts for different loved ones, such as three or four children.

You also don’t have to worry about problems once the beneficiary tries to claim the funds on the Payable On Death bank account. As long as the beneficiary can prove that you have passed on, the money stored in the bank account will be given to that person or transferred to his or her bank account.

Some states (and individual banks) have different names for Payable On Death bank accounts. In some areas of the country, they are also called “Totten Trusts”, which comes from a New York City court (Re Totten) which ruled that it is acceptable for an individual to name a beneficiary for his or her funds in a bank account upon death.

You will also find that some states have additional regulations in place to help protect Payable On Death bank accounts. Some have stringent rules that must be followed in order to change the beneficiary of a Payable On Death bank account, while others limit what you can do with the funds while they are kept in a Payable On Death bank account.

Check with your local bank or the laws on your state for applicable restrictions and regulations for Payable On Death bank accounts.