Beware PODs and TODs

Virtually any bank or brokerage account can provide that it is paid on death (“POD”) or transferred on death (“TOD”) to named beneficiaries. And IRAs, 401Ks, pension plans and insurance policies are typically made payable to designated beneficiaries.

Nevertheless, these beneficiaries are often named with relatively little reflection, and without taking into account what might happen if a beneficiary predeceases the account owner, or if a beneficiary might happen to be a minor. Very often the beneficiary designations are completed without regard to how they interact with the estate plan reflected in the account owner’s will.

These beneficiary designations may prove to be as important, or even more important, than your will. In no event should they be put into place without considering their consequences under a variety of potential scenarios.

For example, if you name your three children as the “TOD” recipients of your $2 million brokerage account, and one of them dies a month before you in a tragic accident, what happens to that child’s one-third share? Does it “disappear” so that the account is paid one-half each to your two surviving children (and that may be the case), or does it go to the four minor children of that deceased child? And if it goes to those minor children, who manages or controls it? The rules in this regard will depend upon the internal rules of the bank or brokerage house, which may or may not have been considered when the beneficiary designation was completed.

In short, these beneficiary designations can be especially perilous and should not be entered into with anything less than the same sort of care and caution that you bring to the making of your last will and testament. For most types of accounts, there will be no need to designate any beneficiaries whatsoever, except for IRAs, 401Ks, other pension plans, and insurance policies. With respect to all other accounts, it is generally better NOT to name any beneficiaries at all, so that the accounts can pass through your will and be disposed of more thoughtfully as a part of your overall estate plan.