Dealing With Payable-On-Death Accounts - Part 1
The following is a guest post contributed by Charles Rechlin, a long-time reader and friend of the site. His last guest post covered add-on CDs. In this two-part guest post, Charles covers POD accounts. Not only does Charles have many years of experience in CD investing, he also worked as an attorney representing clients in the financial services industry. I would like to thank Charles for sharing more of his notes on personal CD investing.
Notes on Personal CD Investing: Dealing with My Payable-On-Death Accounts
by Charles Rechlin
Having, for years, confined my investments to obligations backed by the full faith and credit of the United States, I just can’t seem to get enough federal deposit insurance.
Unfortunately, as much as I wish it were otherwise, the law limits the FDIC and NCUA coverage to which I’m entitled at any one bank or credit union. So, I do everything I can to maximize my coverage within the legal limits.
Like many CD investors, my tool of choice is the payable-on-death (POD) account.
My Approach to POD Accounts
I employ POD accounts only to bolster deposit account insurance, not as an estate planning device.
Had I no need for more than $250,000 in FDIC or NCUA coverage at any institution, I’d have no POD accounts, and would rely solely on my will to distribute my assets at death (I don’t have a living trust). I’m not trying to avoid probate, just trying to get my money’s worth out of Uncle Sam.
The rules governing POD accounts have been discussed extensively on this website. A particularly informative overview appeared in a post by Ken in May 2011. I encourage everyone to read that post.
Basically, FDIC and NCUA regulations provide separate insurance for funds deposited into a “revocable trust account,” defined as “one or more accounts with respect to which the owner evidences an intention that upon his or her death the funds shall belong to one or more beneficiaries.”
A revocable trust account includes a formal living or inter vivos trust. It also includes an informal trust represented by a POD account. (At some institutions, it’s called an “In Trust For” [ITF] account; at others, a “Totten Trust” account.)
A POD account is often created by a signature card or beneficiary designation form. At many online banks, a mouse click is all that’s required.
For FDIC and NCUA purposes, an eligible beneficiary of a qualifying revocable trust account “includes a natural person as well as a charitable organization and other non-profit entity recognized as such under the Internal Revenue Code of 1986, as amended.”
Under federal rules, where a single depositor establishes one or more revocable trust accounts, having five or fewer unique, eligible beneficiaries, the combined accounts are entitled to insurance of up to $250,000 times the number of beneficiaries.
That means, for example, that if you open five accounts each having a unique, qualifying POD beneficiary, you can deposit a grand total of $1,250,000 into those five accounts and are entitled to full insurance on every dollar deposited.
The beautiful part is that it makes no difference how you allocate the balances among the accounts. Four of the accounts can have tiny balances, and the fifth an enormous balance. Yet the entire amount is insured.
The same thing can be accomplished, where permitted by the institution, with one account having five or fewer designated beneficiaries, each entitled to an equal share (or a percentage share specified by the depositor) of the account balance upon the customer’s death.
The coverage for revocable trust accounts is “separate” from any federal insurance on accounts falling within another FDIC or NCUA ownership category. Thus, in my case, it’s on top of the insurance on my accounts having no POD beneficiaries (up to $250,000) and my IRA accounts (up to another $250,000).
There are different—and somewhat more convoluted—rules for depositors having multiple-ownership accounts, or more than five beneficiaries, but as a single man, who likes to conduct my financial affairs as simply as possible, I’ve so far limited my accounts to single-ownerhip accounts with no more than five beneficiaries at one bank or credit union.
To enhance this simplicity, and because I withdraw rather than capitalize posted interest on non-IRA accounts, I ignore accrued interest in calculating the maximum amount I can deposit. I look at federal insurance in terms of principal protection. It’s also easier for my brain to process that way, even if it places me at risk of loss of accrued interest not posted and withdrawn before a bank or credit union fails.
Synching My POD Accounts with My Will
My will, as it has evolved over the last 35 years, provides for specific dollar bequests to seven named legatees—two individuals and five tax-exempt, non-profit institutions (NPIs), including my beloved Alma Mater. The will also provides that, after those bequests, taxes and other expenses, the residue of the estate is to be distributed to my Alma Mater.
Each of my legatees is an eligible revocable trust account beneficiary under the FDIC/NCUA rules.
Very simply, if I need a POD account to boost my insurance at an institution to more than $250,000 (say, when I’m opening a new CD there to take advantage of a promotional rate), I just make one of my legatees a POD beneficiary, either of that or of an existing account.
To accomplish this without disrupting my estate plan, I’ve provided in my will that my specific bequest to each legatee is automatically reduced, dollar-for-dollar, by the amount that legatee is entitled to receive as the beneficiary of any POD account.
Thus, if I’ve made a bequest to a particular legatee of $X, and also established a deposit account entitling that legatee, as POD beneficiary, to receive a $Y balance upon my death, that legatee only takes $X-$Y under the will.
Of course, if prior to my death, I remove the legatee as POD beneficiary on the account, or I close the account, the legatee reverts to getting $X under the will.
This demonstrates one of the most attractive features of POD accounts—their relative informality and flexibility. Because they create no legal or contractual vested interest in favor of any beneficiary until you depart this world, you’re perfectly free to add a beneficiary, remove a beneficiary or otherwise tamper with the amount a beneficiary is entitled to receive when you die. You’re not locked into anything.
This feature of easily changing beneficiary designations is enhanced by your ability, within the federal deposit insurance rules, to allocate insurance among five or fewer beneficiaries so long as the total coverage remains within the maximum allowable.
As an example, I currently maintain a money market account at an online bank. That account, which has a balance of $5 and no maintenance fees or minimum balance, has four POD beneficiaries taken from among the smaller legatees under my will. This is designed to permit me, from time to time, to deposit at that bank:
- up to $250,000 in individual CD, savings and checking accounts having no POD beneficiaries
- up to $1,249,995 in individual CD, savings and checking accounts having my Alma Mater as sole beneficiary
- up to $250,000 in IRA CD and IRA savings accounts (guess who my IRA beneficiary is)
Both the FDIC and NCUA have, on their websites, user-friendly “insurance calculators” (see FDIC calculator and NCUA calculator) that enable you to determine the insurance coverage to which you’re entitled at a given bank or credit union. (Before I submitted this piece, in fact, I used the FDIC calculator to prove to myself—for the umpteenth time--that, were I to deposit a total of $1,750,000 at the online bank as outlined in the previous paragraph, every dollar would be insured.) These calculators are especially useful for verifying your coverage for account structures involving multiple accounts and multiple POD beneficiaries.
Complications
Unfortunately, using POD accounts in the way I do is not without its complications. These I will describe in Part 2.
Update: Part 2 is now available here.
When things go south the FDIC relies on the failed bank's record keeping. So, consider: if a banks' operations are so ****ed up as to be taken down by the FDIC, what are the odds that POD/stacking efforts were properly recorded by the bank? Is the extra yield (usually not that much) worth the risk?
FDIC relies on an institutions' records, and therein lies the problem--it's a black box. In a FDIC take-down depositor paper work would be, at best, probative of the (asserted) correct titling, Would a stacked POD deposit of $1,250,000 (as cited in the article) be of some concern as to interfere with a good night's sleep? As for CD promotions, there's always another bus on the way.
"There is no grace period if the beneficiary of a POD account dies. In most cases, insurance coverage for the deposits would be reduced immediately".
Then--its a "pay-on-death" account.
And its insured for $250 for each beneficiary under the husband--and $250k for each beneficiary under the wife--> for a total of $1.5 million. CORRECT?
Also--lets get our terminology straight--there are accounts, CDs, holdings, institutions, memberships..
Each INSTITUTION is insured separately.
Each titling has its own determination of insurance (FDIC and/or NCUA).
The terminology of "membership" is not in the FDIC and/or NCUA
The terminology of "accounts" is vague --but if the "account" holds certain assets with one type of titling and another "account" holds assets in another type of titling---then there are two accounts and insured as such.
Well--the FDIC and NCUA calculators are definitive on all this. But, 99% of the employees at credit unions and banks are dumb as a post on the subject. And those that "think" they know are even more dangerous. AND THE PERSON WHO COMMENTED THAT YOU BETTER BE SURE THE TITLING IS CORRECT--WELL--GOOD LUCK --CAUSE ANY "FOOL" IN THE INSTITUTION CAN LEAD YOU DOWN TO A FALSE SENSE OF SECURITY.
You tell me how you can verify for sure the institution has the titling correct in their records?
thanks--Retired Banker
When a West Virginia Bank went under (I don't mean a flood)(financial folded)--then so did all their "titling" records (lost the signature cards held in a shoebox);
The FDIC accepted a "affidavit of proof of ownership" submitted via a local judge--cost some bucks and it took an extra 3 months.
Retired Banker
As for what keeps me awake at night, it's not POD accounts but brokered CDs. Maybe I should be worried about both.
During the last financial crisis, this served me well. I didn't have to go scurrying around like a rat checking to make sure that all of my accounts were insured properly.
Some people actually had to run around getting checks to deposit at other banks. When they double-checked their accounts, they discovered that they were over the insurance limits at some of the banks they were doing business with.
A few others were actually talked-out of closing their accounts by bank employees that assured them they were OK. Turns-out, they weren't. And, lost a chunk of change in the process.
Right now, I've got money in Melrose Credit Union. Over the course of the last year they've gotten clobbered due to a significant rise in delinquencies on their tax medallion loans. If I had over 250K in their now, I'd be sweating it.
Who would have thought that a billion-dollar financial institution that's been around since 1922 would get into trouble so fast? Well, the taxi regulators are allowing Uber to detrimentally affect the taxi cab business model in New York City.
If I keep deposits under 250K, I don't have to worry about all of the off-the-wall things that can crush a financial institution.
For that I recommend 18 holes of golf followed by a gin and tonic and then two beers with dinner.
OH --FORGOT--PAY FOR THE ENTIRE DAY WITH PENFED CARD--2% CASH BACK
Retired Banker
In 2008, Congress increased the FDIC/NCUA limit from $250,000 to $500,00. This new way of determining insurance limits was also changed in this law. It use to be determined by each beneficiary's pro rata interest in each account. There are many other implications I also discovered, but I will leave that to another discussion.
I remember calling FDIC lawyers to verify If was correct and at first no one could tell me. Finally, I was able to confirm my findings. At that point, I revealed it to Ken and the readers of his website. Subsequently, Ken wrote the May 2011 post attributing the discovery of the rule change to me. For the sake of history, just thought I should explain the derivation of the May 2011 post.
BTW, I meant to say the insurance limits were increased from $100,000 to $250,000 in 2008.