“Payable on death”? No, we’re not talking about the early 2000’s Nu Metal band “P.O.D” (which also stands for payable on death)

We’re talking about payable on death asset holding accounts.

So what are they?

When you die, there are two types of assets you will own. “Probate assets” and “non-probate assets.” Probate assets are things that have to “go through probate” and, as the name suggests, non probate assets are things you own that don’t go through probate.

Here’s a link on how probate works. A lot of people want to avoid probate because probate takes time, so people get trusts. But a lot of the fears about probate are misguided (in my opinion.) Most of the anti-probate sentiment that you hear can be traced to one man, a financial advisor (not even a lawyer), who wrote a book that convinced the public that probate is the worst thing ever. Read that story here.

Anyway, getting back on topic. “Payable on death accounts (POD for short)” accounts or “transfer on death accounts (TOD),” are terms that refer to any account you have where you have designated a payable on death or transfer on death beneficiary. This is something you’d do with the institution where the account is held.

For example.. If you have stock accounts held at Vangaurd, you can contact Vangaurd and tell them “hey, when I die I want my child to be listed as a payable on death beneficiary (or transfer on death… means the same thing)” OR, you can even do that on the Vangaurd app or website, they have a category for it where you can list who you want your beneficiary to be. Fidelity has the same options. Most people have beneficiaries listed on their stock accounts. When you do this, the money will pass immediately to the beneficiary rather than having to go through probate… with some practical caveats though.

You can also have bank accounts be payable on death. It depends, some banks offer that option, some don’t. You’d have to check.

All your other assets not listed in a payable on death account or not in a trust, go through probate.

So now that you know that lets talk about the practical outcomes of having payable on death accounts.

I strongly advise having them. They’re easy to set up (and free), they avoid probate, and they’re not taxed if they’re under $2m (in MA) or under $12.9m (in CT).

One thing that blindsides people is this – the transfer isn’t literally instant and it sometimes takes time to actually cash out the accounts.

When a person dies and you’re a beneficiary on a POD account, you’d contact the institution where the account was held and notify them about the death. Any interest or gains accrued on the account from the time they die while the money is remaining in the account will be taxed. So if it takes a week for you to take out the money, any gains on the account you do have to pay capital gains taxes.

But you’ll contact the institution, let’s say Vangaurd, and they’ll require you to send over the death certificate and obituary. Institutions actually prefer obituaries because they’ve become harder to fake than death certificates. Thats the worry – these institutions want to make sure that you’re the right beneficiary and that the person is actually dead. For that reason, sometimes institutions like Vangaurd may request a “Fiduciary Certficate” from the probate court, or a letter from an accountant verifying no taxes are owed… It varies by institution. But if they ask for a “Fiduciary Certificate” don’t be scared – it’s the first document you receive after opening a probate estate and you typically receive it pretty quickly.

In sum, POD accounts are great because they avoid probate oversight, but sometimes it can take a little time to actually receive the money from them depending on what the account holding institution requires. Typically though, this will be a much faster process than actual probate.