There are many tools you can use to distribute your assets when you pass. Two of the most common options are trusts and payable on death (POD) accounts. Both of these tools allow you to transfer assets to your beneficiaries without going through probate. However, if you are wondering if you should use a trust or a POD account in your estate plan, you should understand the key differences between the two before you decide.
How a Trust Works
A trust is a legal entity you can use to distribute your assets when you pass. Once you create it, you transfer your assets into the trust for your trustee to manage (you are usually the trustee until you die). After you pass, your trustee manages the assets for your beneficiaries. There are many types of trusts used for different purposes. The two most common are revocable and irrevocable trusts.
In a revocable trust, you control the assets, and you can make changes to the trust or revoke it altogether. With an irrevocable trust, once you transfer the assets to the trust, you cannot change or revoke them.
One of the main benefits of a trust is that you can use it to control how you distribute your assets at your death. You can specify how much each beneficiary receives and when they receive it. This is useful if you have minor children, or if your beneficiaries are not able to manage their own inheritance.
Trusts can also provide some protection from creditors and lawsuits. Because the trust owns your assets, they may be more difficult to seize in the event of a lawsuit or bankruptcy.
How a POD Account Works
A payable on death (POD) account is a financial account that allows you to name a beneficiary to receive your funds at your death. You keep control over the funds while you are alive, so your beneficiary does not have access to the account until you die.
Setting up a POD account should be easy to do through your bank or financial institution. You fill out a form that names your beneficiary, and the funds in the account will transfer to them after your passing.
A POD account is an easy and low-cost way to transfer assets to your beneficiaries.
Trusts Vs. POD Accounts
Trusts and POD accounts each have advantages and disadvantages.
Creating a trust is a more complex and costly process than setting up a POD account. You will need an attorney to help you create a trust, and many trusts need ongoing maintenance. Some people find trusts too much of a burden to create and manage.
On the other hand, a POD account does not provide you the same level of control as a trust. Once your beneficiary receives funds from the account, they can use them as they see fit, even if they are not responsible enough to handle the money. Also, it is unclear what happens with your POD account if your beneficiary dies or is disabled, and it does not provide protection if your beneficiary has creditors. Any disputes about how a POD is implemented are determined by the financial institution, not your trustee (if you have a trust) or a court. POD accounts also do not offer protection for money left to minors. If you name a minor on your POD, you have a difficult situation where the funds must be managed through the court system until the person reaches age 18.
Also, a POD cannot be equalized with other assets. So, we frequently see one person end up with more than was intended because certain assets decreased in value more than someone anticipated when they made the POD.
POD accounts are much less secure than trusts, because there is always the risk that something unexpected will happen before the funds are paid out, and your money will not necessarily be protected.
The last disadvantage of a POD account is that it can change without your knowledge if there is an internal change at the financial institution.
Which of These Tools Is Right for You?
Which of these tools you should use depends on your goals, assets, and circ*mstances.
If you want to control how your assets are distributed and provide security for your funds and some protection from creditors and lawsuits, a trust may be right for you. But, if you are looking for a simple and low-cost way to transfer assets to your beneficiaries, a POD account may be the way to go.
It is important to consult an attorney and financial advisor to help you make this decision. These professionals can talk you through the benefits and drawbacks of each tool and help you make the right choice for you.
Need more information about trusts vs. POD accounts? Schedule an appointment with us, we are happy to answer your questions!
Disclaimer: The information you obtain in this post is not, nor is intended to be, legal advice. This blog shares general best practices when navigating Virginia or West Virginia law, but you should consult an attorney for advice regarding your individual situation.
Joshua E. Hummer, Esq. is the founder of Relational Estate and Elder Law, and he has been a practicing attorney for over 15 years. While experienced in many parts of the law, Josh specializes in estate planning, estate administration, and elder law. He is licensed in both Virginia and West Virginia. Josh’s passion lies in helping people gain peace of mind about the future through holistic legal planning. When he isn’t meeting with clients or crafting legal documents, Josh enjoys spending time with his lovely wife, Jill, and their four vibrant children.
