Payable-on-death bank accounts offer an easy way to keep money—even large sums of it—out of probate. All you need to do is properly notify your bank of whom you want to inherit the money in the account or certificate of deposit. The bank and the beneficiary you name will do the rest, bypassing probate court entirely. It's that simple.
This kind of account has been called the “poor man's trust.” And it's true that a (free) payable-on-death account designation avoids probate just as well as an expensive, lawyer-drawn living trust would.
As long as you are alive, the person you named to inherit the money in a payable-on-death (POD) account has no rights to it. If you need the money, or just change your mind about leaving it to the beneficiary you named, you can spend the money, name a different beneficiary, or close the account.
Payable-on-death accounts go by different names in different places. Your bank, for example, may respond to your request for a payable-on-death account by handing you a form that authorizes the creation of something called a “Totten trust.” Payable-on-death bank accounts are also sometimes called tentative trusts, informal trusts, or revocable bank account trusts. You may see your account referred to as an ITF account, short for “in trust for.”
If you set up a payable-on-death account, you can increase your coverage from the Federal Deposit Insurance Corporation at a particular institution. The general rule is that the FDIC insures each person's accounts at a financial institution up to $250,000. So if you have bank accounts or CDs at a particular bank that together are worth $250,000, you’ve maxed out your FDIC coverage at that bank. If you opened another account in your name, it wouldn’t be covered.
If, however, you opened a second account with a POD beneficiary, that account would be separately insured up to $250,000—so, in effect, your coverage is doubled. To check on FDIC coverage for your accounts, go to the FDIC’s easy-to-use “Electronic Deposit Insurance Estimator.”
You can’t shortchange creditors or your family with a POD account—avoiding probate doesn’t mean avoiding your legal obligations. So if you don't leave enough other assets to pay your debts and taxes or to support your spouse and minor children temporarily, a POD bank account (or any other asset that passes outside probate) may be subject to the claims of creditors or your family.
Your spouse may also have rights. If you live in a community property state, your spouse (or your registered domestic partner) is probably already the legal owner of a half-interest in your account, even if the account is in your name only. If you contributed money you earned while married, that money and the interest earned on it is community property, and your spouse owns half of it. (Not everything is community property: money acquired before you were married, or inherited or were given separately, is your separate property unless it's been mixed with community property.)
If the money in your account is community property, and you want to name someone other than your spouse as the POD beneficiary for the whole account, it's a good idea to get your spouse's written consent. Otherwise, your spouse could assert a claim to half of the money in the account at your death, leaving the beneficiary you named with only half.
In other (non-community property) states, a surviving spouse who isn't satisfied with what he or she inherited may be able to claim part of the money the deceased spouse left to someone else. It's rare, though, that a spouse goes to court to claim assets.
The POD payee you name has no rights to the money as long as you're alive. After your death, all a POD beneficiary needs to do to claim the money is show the bank a certified copy of the death certificate and proof of his or her identity. If the account was a joint account to begin with, the bank will need to see the death certificates of all the original owners. The bank records will show that the beneficiary is entitled to whatever money is in the account. The bank doesn't need anything from the probate court. Depending on state law, there may be a short waiting period before the payee can collect the funds.