When it comes to financial matters, there’s a never-ending alphabet soup, FDIC, SEC, APR, and so on. Add two more important ones to your list -- POD (payable on death) and ITF (in trust for).
Unfamiliar? In a nutshell, POD is when one person puts money into an account, with the intention of helping another. While the person who deposited the money is alive, the money is his. When he dies, the money goes to whoever is named on the account, explains estate attorney Everett Sussman of the Law Offices of E.G. Sussman. With an ITF, one person puts money in an account, in trust for someone else. “The intended beneficiary has immediate equity in the account, and the creation of the account constitutes a completed gift. When the person who created the account dies, the beneficiary receives the funds,” he says.
Pat Simasko, principal of Simasko Law, says there is no legal distinction between ITF/POD accounts. “In reality, POD (Payable on Death), ITF (In Trust For) and Totten Trust all mean the same thing. They are informal plans to pass accounts to the next generation without probate. When a loved one dies, those listed on the POD/ITF accounts get the money without going through probate.”
Okay, so how do you decide which account is best for you? The difference is based on equity. The creator of the account retains ownership and control of the asset with a POD (so is subject to creditor claims against him). In an ITF, the beneficiary immediately takes an equity (but not possessory) interest, protecting the asset from the creator's creditors (with certain exceptions).
“What is best for you depends on your personal situation, which is an excellent subject for discussion with your estate planning attorney,” says Sussman.
What you need to know
With Sussman’s 25 years of experience, he has some concerns, “It has been my experience that both ITF and POD accounts have their uses, but too many unwary people fall into a trap - for example: Mom dies, leaving a will that distributes her probate estate evenly to her three children, in accord with her wishes. Unfortunately, the attorney who wrote the will failed to discover a POD account - which does not go through probate, and therefore is not controlled by the will - containing a large sum of money, naming only one child. In this situation, one child receives substantially more from the estate than does his siblings.”
But such chaos can be prevented. “Provide full information about assets, investments, and creditors to your estate planning attorney. This helps him create a comprehensive plan that best accomplishes the goals of the client(s) and bring experts (CPA, e.g.) if necessary to understand the ramifications of certain transfers,” says Sussman.
Marcia Noyles, a director of communications for an IT health firm, says, “I'm not an estate attorney or a banking pro, but wanted to pass on a little tidbit. Both my dad and husband have died within the past three years, so I'm hyper aware of opening bank accounts and putting POD information on each one. I've found that not all of the low-cost online banking accounts offer POD as part of that account. In fact, very few do. You have to dig for the information and be very specific about what you want when you open an account. I've turned down accounts, because they didn't have those attached to them.”
Doug Martinson, an estate planning attorney with Martinson and Beason believes that while FBO and POD accounts can be helpful estate planning tools, they should be used with the advice and guidance of an experienced estate planning attorney. “Problems may arise when named beneficiaries are minors or die before the owner of the account,” he says.
Also, people must understand the difference between joint ownership and POD/ITF. Simasko points out that with ITF/POD, the beneficiaries listed on these accounts have no access to the funds until after the account holder passes away. This means the accounts are protected if the beneficiaries ever get sued or go through bankruptcy. When the account holder passes away, the beneficiaries get the money and it’s no longer protected. The issues with ITF/POD is that the beneficiaries can’t pay the account holder’s bills (if needed) because they aren’t listed as a joint owner. It that case, the account holder should have a power of attorney on file.
Furthermore, a concern with POD, ITF and joint accounts, is that they supersede the account holder’s will. Says Simasko, “If the account holder says everything they own goes to their five kids equally, but they name their oldest son on the account as POD/ITF/joint owner, the oldest son gets all the money. He doesn’t have to share it with his siblings. That’s where the war starts and breaks up a family.”
There are some important questions to think about when setting up one of these accounts. “Who do you want to get your stuff, are the beneficiaries listed on your accounts trustworthy, are the beneficiaries listed on your accounts mature enough to handle your funds, are the beneficiaries listed on your accounts receiving governmental benefits?” says Simasko.
If you have trustworthy beneficiaries without any major issues in their lives, then using POD, ITF and joint accounts work well because they’re easy to set up and cost you nothing. However, you should still have a financial power of attorney on file so that someone can pay your bills (if needed), he adds.
Simasko says if you think your beneficiaries may have issues, then simple and cheap may not be enough. “A formal Revocable Trust should be set up so that you can pass your accounts to beneficiaries without probate and with added protections for issues that may arise for beneficiaries (divorce, creditors, etc.).”
Don’t go it alone. Says Simasko, “It’s important before you make any decision to sit down with an elder law attorney to discuss your options. A bank representative may ask you who you want listed on your accounts, but is unable to give you any legal advice.”
Editor's Note: For more information on the effect of POD/ITF designations on deposit insurance coverage, please refer to the article, Maximizing Your FDIC Coverage with Beneficiaries.