Dealing With Payable-On-Death Accounts - Part 2
The following is the second of a two-part guest post contributed by Charles Rechlin, a long-time reader and friend of the site. This two-part series covers Payable-On-Death (POD) accounts. The first post focused on using PODs to bolster deposit account insurance. This second one focuses on the complications of establishing 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 - Part 2
by Charles Rechlin
There’s nothing original or unique about how I use POD accounts to bolster deposit insurance. It’s pretty rudimentary and straightforward.
Nevertheless, there are several vexing details I have to grapple with from time to time for it to work the way I want it to.
Identification of POD Accounts on Institutional Records
FDIC and NCUA rules require that a revocable trust account, such as a POD account, must be identified as such on the records of the bank or credit union. Those records must also identify the beneficiary or beneficiaries of a POD account.
The FDIC rules provide that the intention to create a revocable trust account must be “manifested in the title of the account using commonly accepted terms such as, but not limited to, ‘in trust for,’ ‘as trustee for,’ ‘payable-on-death to,’ or any acronym therefor.” The requirement for a proper “title,” however, is satisfied “as long as the institution’s electronic deposit account records identify (through code or otherwise) the account as a revocable trust account.”
The NCUA rule uses different language, requiring that the intent to create a revocable trust account “must be manifested in the title of the account or elsewhere in the account records of the credit union . . . or by listing one or more beneficiaries in the account records of the credit union.” (italics added)
Because my POD insurance coverage depends upon proper institutional record-keeping, I periodically verify, to the extent practicable, that my deposit account records comply with the rules.
Sometimes it’s relatively easy. Ally Bank, for example, which used to show an “account title” on a customer’s online banking pages, but no longer does, displays a page listing beneficiaries for each account, and indicating whether the account is payable on death. This seems consistent with the FDIC requirement that the bank’s electronic records “identify (through code or otherwise) the account as a revocable trust account.”
Alliant CU provides an online banking page listing the beneficiaries for each account, including the name and the percentage interest assigned. This seems to satisfy NCUA requirements.
Sometimes, though, it’s not so easy to verify that an account’s POD status is correctly reflected on institutional records. For example, Nationwide Bank includes a notation “POD” but does not identify beneficiaries in my online banking statements. There, I rely in part upon the hard copy “payable on death designation form” I originally submitted to the bank, as well as periodic email confirmations I request from Nationwide, to confirm the information is accurately recorded.
Then there’s CIT Bank. As I recently posted in the Forum, CIT used to provide, as part of the “Account Details” information on its online banking pages, each account’s POD status and beneficiaries. The bank ceased doing this in June when it made website “improvements.” Now you have to ask CIT for a letter to confirm what’s shown on its records.
Availability of POD Accounts
Not all institutions permit customers to establish POD accounts.
For example, Capital One 360’s account disclosures appear to limit revocable trust accounts to formal living trusts. (This was the practice in effect when I had accounts at its predecessor online bank—ING Direct.)
I’ve also encountered credit unions that will not establish a POD account unless all of the member’s accounts are set up the same way. I discovered this recently when I tried to take advantage of favorable CD promotions at NASA FCU and Mountain America CU, and was unable to open separate POD accounts to increase my deposits at these credit unions to more than $250,000. This largely, if not completely, defeats my purpose in establishing POD accounts.
Use of Non-Profit Institutions (NPIs) as Beneficiaries
Perhaps the most frustrating POD limitations I’ve encountered are restrictions, by some banks and credit unions, of POD beneficiaries to natural persons.
Several years back, when I tried to name one of my NPIs as a POD beneficiary on a Salem Five Bank CD account, I was told in no uncertain terms that Massachusetts law did not permit an entity to be a POD beneficiary. (I’ve never bothered to check this out.)
American Express Bank FSB (where I no longer have any accounts, POD or otherwise) also prohibited me from opening a CD with one of my NPIs as POD beneficiary. As explained on its website:
“Beneficiaries named on POD accounts must be individuals. POD accounts cannot be set up in the names of trusts. Certain state law restrictions apply to POD accounts.”
Firstmark CU—which I joined when it was an “easy access” credit union (it no longer is)—originally let me use my Alma Mater as a POD beneficiary, but then changed its policies prospectively to limit my beneficiaries to individuals.
Because the vast bulk of my estate goes to NPIs under my will, this sort of restriction puts something of a crimp in my CD investing activities.
Even where an institution permits an NPI to be a beneficiary of a POD account, getting this accomplished can be tricky. That’s because the signature card and beneficiary designation forms, including electronic forms, used by most banks and credit unions are simply out-of-date.
Amendments to FDIC and NCUA insurance rules in 2008 broadened the categories of permitted revocable trust account beneficiaries to include all natural persons (previously limited to certain family members of the depositor) and tax-exempt NPIs (previously, an entity could not be a beneficiary). Unfortunately, many bank and credit union forms never caught up with these rule changes.
Thus, it’s still common for forms to ask for the beneficiary’s Social Security Number, with no alternative of providing a Taxpayer Identification Number or Employer Identification Number, which is configured differently from an SSN and can’t be entered on most online forms.
Also, many signature cards and beneficiary designation forms ask for the “relationship” of the beneficiary to the depositor, harkening back to the old rules when only family members qualified. The correct answer is often “other,” but I’ve often wondered what would happen if I tried to put down “human being” or “favorite charity” as the answer.
These glitches can be dealt with, of course, with a phone call or email, but the existence of out-of-date forms raises questions about your bank or credit union’s compliance with the much more critical record-keeping rules. You have to ask yourself: Do they know what they’re doing with POD accounts?
Social Security Numbers
I’m sure I’m not unique in having absolutely no interest in knowing another person’s Social Security Number, much less providing that number to a financial institution with which the person has no relationship. To me, possession and transmission of another person’s SSN is potentially toxic, exposing me to nasty finger-pointing if the number is stolen or otherwise leaks out in some way.
I guess banks and credit unions ask for your POD beneficiary’s SSN as a way of double-checking the bona fides of a stranger who shows up with a driver’s license and a copy of your death certificate in hand. But it would be easier if they’d just stop asking me for it.
I currently have accounts at four institutions that haven’t required an individual beneficiary’s SSN—Synchrony Bank, Nationwide Bank, Ally Bank and Alliant CU. I’m sure there are others like them. We need more.
Keeping Track of Beneficiaries
According to the FDIC, “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.”
In other words, in the time of your bereavement, don’t forget about your POD accounts—or your will, for that matter.
I suppose the same is true if an NPI beneficiary ceases to exist or perhaps loses it tax exemption—for example, for failing to file necessary returns with the IRS. The latter actually happened with one of my smaller NPI beneficiaries, but, fortunately, its tax-exempt status was reinstated before it became an insurance issue for me.
Obviously, there are many estate planning, domestic relations, tax and other real-life personal issues involved in using POD accounts. I face none of these issues myself, so I haven’t touched upon them here. Frankly, the FDIC and NCUA issues I’ve discussed are more than enough for me.
Someday, I hope to have no POD accounts to worry about. But that will only happen, I’m afraid, when I’m able to replace all or most of the CDs in my portfolio with US Treasury Bills and Notes. And, with central banks seemingly wedded to policies of ever greater financial repression of savers, that seems a long way off indeed.
I put a disclaimer in about issues I am not addressing in the article, including "domestic relations" issues, because they don't apply to me, and I have no expertise in them. Perhaps another reader can. respond to your questions about community property issues.
I have specifically nixed the idea of going to any bank or CU that requires it, but that has nixed only a few over the years. I actually figured out the e-mail address for the CEO at one CU and e-mailed about that requirement, and she e-mailed back surprise that her CU required that and no idea why. She specifically waived that requirement for me -- yet it remains for anyone else who might open an account there. I did similar with another CU, and they too have waived that requirement for me, but continue the policy of requiring it for others. Makes no sense.
Yes, there is a suggestion from some that it will be needed when a beneficiary comes to claim in order to help identify them. But there are plenty of other, more reliable ways to make that identification. In fact, an SS number does not identify you, it only tells what account to send in reports about. And they can require the SS number at time of claim if they want.
I think the comment in this article about the forms simply not being updated might actually be the reason why. I think some CEOs just have not even focused on the policy, and now see it in place and figure there must be a reason, so leave it there without bothering to figure it out.
Any place that requires SS number of a beneficiary loses all business with me. And I expect they lose plenty of other people too.
to #5 -- as a practical matter, don't count on the bank notifying beneficiaries. If you don't want your beneficiaries to be aware of their status,let someone else (e.g., you executor) know and/or leave written instructions to be opened posthumously. And remember, the beneficiary form may not have even asked for the beneficiary's contact info, or the info may be outdated.
Nonetheless, a beneficiary's own notification to an FI of their interest in a deceased depositor's account(s) I daresay is the most efficient.