What are the pros and cons of Payable-on-Death accounts?

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Q. Are Payable-on-Death and Transfer-on-Death accounts permitted in New Jersey?
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A. The simple answer is yes.

Both Payable-on-Death (POD) and Transfer-on-Death (TOD) accounts are available in New Jersey.

Both types of accounts allow you to name one or more beneficiaries of the account in the event of your death, said Gene McGovern, a certified financial planner with McGovern Financial Advisors in Westfield.

A POD designation is used for bank accounts such as a savings account or a certificate of deposit, he said, while a TOD designation is used for brokerage accounts that hold securities, such as stocks, bonds or mutual funds.

The assets in a POD or TOD account pass by law outside of probate, directly to the beneficiary or beneficiaries at the owner’s death, McGovern said. They are not part of the decedent’s probate estate and not subject to the terms of the will.

“To receive the POD or TOD account proceeds, an individual beneficiary usually needs only present identification to the institution, along with a certified copy of the death certificate,” he said. “In New Jersey, a completed Form L-8 or other form of inheritance tax waiver may also be needed to release the account.”

During the account owner’s lifetime, the account belongs solely to the owner or joint owners, McGovern said. The POD or TOD beneficiary has no rights to the account until after the last owner’s death. Moreover, the owner may change the beneficiary at any time, withdraw all the money, or close the account.
POD and TOD accounts have pros and cons.

“On the plus side, they’re an easy way to transfer assets directly to the intended beneficiaries, bypassing the probate process. It should be noted, though, that New Jersey probate is relatively simple and inexpensive,” McGovern said.

There are no limits on the size of a POD or TOD account, and a single account can have multiple beneficiaries, he said. Those beneficiaries can be any living person, as well as a trust, a company, or a nonprofit organization.

On the other side of the ledger, if the decedent’s estate doesn’t have enough remaining assets to pay its debts, administrative expenses or taxes, assets transferred by POD or TOD accounts may be used to pay those expenses, McGovern said.

“Another potential drawback is that you can’t name an alternate or contingent beneficiary for a POD or TOD account,” he said. “If your beneficiary predeceases you, you’ll need to name a new beneficiary, or else the money in the account becomes part of the probate estate.”

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This story was originally published on Aug. 30, 2022.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.