Often, financial planners and financial institution representatives suggest that their account holders add a payable on death (POD)(term used for bank accounts) or transfer on death (TOD)(term used for securities) designation on accounts so that when the account holder dies, the account passes outside of the will and automatically belongs to the named beneficiary. While there is sometimes a valid purpose in doing so, the POD may create unintended consequences making estate administration more difficult and creating division between beneficiaries. Let’s consider the case of Louise:
Louise, a widow, dies unexpectedly. She had a life estate in her principal residence (100 acres with her house and several outbuildings) with her three children owning the remainder interest. When she died, Louise’s three children became the owners of the real estate by operation of law. Life estate deeds are subject to inheritance tax based upon the date of death value. The date of death value for the real property was $500,000.00. The rate of Pennsylvania inheritance tax for property passing to children is 4.5%, meaning $22,500.00 in tax for the real estate is due to the Pennsylvania Department of Revenue within nine (9) months of Louise’s date of death. She had one small checking account in her name alone with less than $1,000.00 in it, a 2020 Subaru, and a cash management account in the amount of $30,000.00 POD to one of her three children (the child who always helped her with chores and took her to appointments). It was unclear whether Louise wanted to solely benefit this child with the cash management account money or whether she was following her financial planner’s advice to add the POD to avoid probate.
As in Louise’s estate situation, POD accounts can cause lack of liquidity for her estate representative. While the three children are deciding whether to keep the real estate, sell the real estate, or buy one of the other children’s shares, there are ongoing expenses that need to be paid plus inheritance tax. If there was no money, the inheritance tax and ongoing expenses for the real estate should be equally borne for all three children. Unless the child receiving the cash management account volunteers to contribute the monies in the account to pay for inheritance tax, all three children will have to produce the needed money within 9 months, or within 90 days if they want to take advantage of a prepayment discount. This works if everyone gets along and has a singular purpose. Unfortunately, when there is a death in the family, often emotions of the beneficiaries or their families cause difficulty. Also, once people have money, it is often more difficult for them to give it back.
Understanding what is probate in Pennsylvania and speaking with an experienced elder law attorney regarding your particular family and financial situation is necessary to understand and anticipate potential pros and cons of POD accounts. Probate may add a little time and cost, but the estate assets are still taxed the same whether they are probate or non-probate.
