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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.

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

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.

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

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.


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.

Previous Comments
  |     |   Comment #1
For clarification, are you saying that you must open  five different CD's each having a unique beneficiary to provide a grand total of $1.25 million FDIC or NCUA insured coverage?  I was always under the impression, that you could have five different CD's and each of the five CD's had the same five different beneficiaries and still be covered for a grand total of $1.25 million FDIC or NCUA insured coverage. 
  |     |   Comment #2
Also I was under the impression that it did not matter how many CD accounts you had.   As long as you had the same five beneficiaries assigned to each of the CD's, you had a grand total of $1.25 million FDIC or NCUA insured coverage.
  |     |   Comment #3
Sorry if the language was confusing.  The sentence about 5 CDs with 5 different beneficiaries was intended as a "for example.,' not as the exclusive way the rule could be used.  It in fact reflects how I tend to structure my portfolio.  You can also  have five different CDs with the same five different beneficiaries, so long as the total is within the $1.25 million.  Ditto, an unlimited number of CDs with the same five different beneficiaries, again so long as $1.25 million is not exceeded.  This demonstrates why the FDIC and NCUA insurance calculators are so useful--you can run these various alternatives through them to make sure you're covered.
  |     |   Comment #4
Thanks.  Very helpful.  I hope your part 2 has some suggestions on how to assure that the credit union or bank has the accounts setup correctly with the proper beneficiaries.  Penfed Credit Union is one of the very few that list the beneficiaries online so that you can verify this.  CIT Bank did this also until they just recently made some changes to their login account and now you can no longer view the beneficiary information.  I have had many instances where I did the proper paperwork and then later called to verify and discovered that the beneficiaries were not assigned correctly.  Do you avoid banks like Capital One 360 that do not allow POD/Beneficiary accounts?
  |     |   Comment #5
I would not want that info on line.  Penfed snail mailed mine
  |     |   Comment #9
The subject of bank/credit union record-keeping requirements--and the strengths and weaknesses of certain institutions in this regard--is covered in Part 2.  Also, Capital One 360.
  |     |   Comment #6
"I employ POD accounts only to bolster deposit account insurance..."

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? 
  |     |   Comment #7
this comment is correct.  It must be properly recorded in the bank/cu records if the institution goes belly up.  Just make sure to dot your i's and cross your t's
  |     |   Comment #21
I had a CD at a CU that went under and was taken over by another CU. The new CU had no record of the original purchase date of the CD and tried to charge me incorrect EWP based on the assumption that I had purchased the CD just before the other CU went under. I had to go home and find my records from the original CU.  As others have pointed out here, this is not something to play around with.
  |     |   Comment #8
" Just make sure to dot your i's and cross your t's"

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.
  |     |   Comment #10
Good article.  A very important fact is that Upon the death of a Simple joint account owner, the FDIC provides 6 months grace deposit insurance while a replacement owner is added, or the acct. title is updated.  HOWEVER, if a POD account beneficiary dies, at that time the Additional deposit insurance (being depended on for coverage) is immediately terminated, potentially leaving those funds uninsured.  Food for thought!
  |     |   Comment #11
Thanks.  I've covered the beneficiary death point in Part 2, but never thought about the joint account owner advantage.  That's because--as I state at the very end of Part 2--I only have myself to think about in setting up accounts! 
  |     |   Comment #25
In a situation as in comment #10, coverage is not immediately terminated.  The depositor has up to 6 months to arrange changes in order to maintain the additional deposit insurance.
  |     |   Comment #27
Per the FDIC FAQs: "How does the death of a beneficiary of an informal revocable trust (e.g., POD account) affect insurance coverage?
"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".
  |     |   Comment #42
Perhaps I wasn't clear, if a joint owner (NOT a POD) person dies, yes the deposit INS continues for 6 months (as if the joint owner had not died), but if a named POD dies, the deposit coverage attributable to the dead person (a POD beneficiary) THAT coverage is NOT subject to the 6 month ext, and immediately terminated. Thus,any such funds might still be covered if any remaining benificiaries are living.  SEE PART TWO OF THE AUTHORS ARTICLE WHERE THIS IS DETAILED!
  |     |   Comment #28
Here is a solution to the problem.  In the case of a death, immediately make me the new beneficiary.  Problem solved! You are now totally insured.
  |     |   Comment #29
I'd have to give that a lot of thought first.
Retired Banker
  |     |   Comment #12
If you have an account jointly with your wife and list 3 beneficiaries.

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
  |     |   Comment #13
The subject is covered in Part 2.  But the short answer is that, if its not on your online banking pages or your periodic account statements, you have to rely upon your own records--signature cards, beneficiary designation forms, account statements, whatever you've got--and hope you can convince the FDIC or NCUA that the institution made a mistake on its records.  There's a 1994 FDIC staff opinion that at least gives me some comfort about their willingness to look outside the bank's records. 
  |     |   Comment #14
thanks ChasR

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
  |     |   Comment #15
Thanks.  I've been fortunate enough to have suffered through only one bank failure--Advanta Bank. Fortunately, I had no POD accounts there.  I got paid off within one week.

As for what keeps me awake at night, it's not POD accounts but brokered CDs.  Maybe I should be worried about both.
  |     |   Comment #22
if you have a joint acct, it is 500000 times the no of pods elected ex 3 pod it is 1.5 mill,if it 7 pod it 3.5 mill their is no limit on the no of pods, result jt acct 500000x the no of pods,this article is not correct check with fdic and ncua
  |     |   Comment #33
The article specifically says it does not address joint accounts.  It deals only with the rules for single accounts.  Please read an article before asserting it is "not correct."
  |     |   Comment #16
In order to be able to sleep well at night, I've never put more than the government insured limit into any single financial institution.   Now, with the 250K limit, I really don't see the point in changing that approach.   

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.  
  |     |   Comment #17
I certainly see your point.  If you restrict your max. of $250K, then you are definitely insured.  I think if I were to ever have over $250K, I would be sure, for my records, that I had copies of my forms on designated beneficiaries that I sent the institution plus written verification from the institution on how my accounts are setup. I would be sure to run the insured limits through the calculators that ChasR earlier recommended a print out a copy to keep with my records.
  |     |   Comment #30
You can have all the copies of paperwork you want as proof, but it is only what the banks and CUs have on their files that counts to the Feds and their FDIC and NCUA insurance.
  |     |   Comment #31
Probably so. But if the bank were to be in error on this, keeping a personal record would be better than nothing.
Retired Banker
  |     |   Comment #26
WELL, Now to "sleep well at night"  --that's a different problem.

For that I recommend 18 holes of golf followed by a gin and tonic and then two beers with dinner.


Retired Banker
  |     |   Comment #32
which card at penFed has 2% cash back on all charges?
  |     |   Comment #18
Money is such a headache, spend it all and enjoy life. Your money will be worth 10cents on the dollar by the time your hares receive it and they will spend it anyway on trips, cars, houses, boats and or gamble it, it is not worth anything to them, they didn't work for it or sacrificed to save it.
  |     |   Comment #19
suprise there's not more talk about using qualified charities the FDIC  allows for beneficiaries, even more suprising how many bankers know nothing of this when you ask them. If not for Ken reporting it here either would I
  |     |   Comment #20
There's more extensive discussion of this subject in Part 2, particularly the problem of banks and credit unions being clueless about charitable POD beneficiaries.
  |     |   Comment #23
To verify that the proper beneficiaries have been assigned to your account, it just makes sense that this information should be provided as an option to be documented on your online account.  I hope that your part 2 version will list the institutions that you know of that provide this information.  Currently, I only know of three that do this (Ally Bank, Allied Credit Union, and Penfed Credit Union.  Also still a mystery to me is why Penfed does not list online the POD/Beneficiaries for IRA accounts.   
  |     |   Comment #24
In addition to the three you mentioned, POD beneficiaries are shown for me online at Synchrony and Barclays. PenFed, so far, has only shown "POD" but not named beneficiaries, but they said they would put beneficiaries online at my request.  I've so requested.
  |     |   Comment #43
Navy FCU also list online the POD beneficiaries.  For IRA accounts only though.
  |     |   Comment #35
The May 2011 post you referenced by Ken (where he credited me for this discovery) was written after I discovered this change in how beneficiaries in different accounts could be aggregated for the purpose of determining the total entitled insurance for the account owner.  For example, two separate accounts with the same owner that each have a different beneficiary could be entitled to $500,000 in total insurance, regardless of how much money was in each account. One account could have $499,000 and the other $1,000, and both accounts would still be insured.

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.
  |     |   Comment #36
Thanks for all the background info.  I remember reading Ken's May 2011 post at the time and and saying to myself "no way."  Then I went directly to the FDIC/NCUA insurance calculators and proved it to myself.  I started using the disproportionate allocation of balances after that, most notably at Alliant and PenFed.  
  |     |   Comment #37
That's interesting because it was the 5% 10-yr certificates offered by PenFed in Jan 201l that gave me the impetus to research this issue. I knew I was going to be far over the NCUA limits, and I believe PenFed prohibited pro rata beneficiaries so I was astonished when I stumbled upon this. At first I didn't believe it and no one at the FDIC did either until I was transferred to a very knowledgeable attorney. Fortunately, I was able to take advantage of the PenFed offer (I maxed out on them); I even borrowed from other CDs that were not maturing until the following year because I knew it might be a long time before we saw rates this high again.

BTW, I meant to say the insurance limits were increased from $100,000 to $250,000 in 2008.
  |     |   Comment #38
I wish I'd gotten into that 5% 10-year CD in 2011.  At least I got a bunch of the 3.04% 5-year CDs in 2013.
  |     |   Comment #39
Me too with the 3.04% CDs, but I kind of wished that I had selected the 7-year CDs instead.
  |     |   Comment #40
I forgot that there was a 7-year deal at the same time!
  |     |   Comment #41
I can remember years ago when I would look in the Baron's table on the highest certificate rates available.  Most of the time, Penfed would be on top of the list offering the highest rate.  Not anymore though.  
  |     |   Comment #44
Just got an email from Capital One 360. They are no longer doing check image deposits.
  |     |   Comment #45
You can only use the mobile app for check image deposits. Using a web browser and uploading the check image for deposit purposes no longer available with Capital One 360.

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