To understand the benefits of pay on death (POD) or transfer on death (TOD) accounts you have to first take a look at the process of probate. When an individual dies the estate has to go through probate, which involves the legal administration of the will if there is one and the settling of any debts that may exist. This is done through a probate or surrogate court proceeding, and in many cases it can be nothing more than the shuffling of a lot of paperwork. However, if the will is being contested or if no will existed when the person in question passed on, it can be a more complex matter.
Whether the probate process goes smoothly or not, there are good reasons to avoid it. For one thing, it takes time. Even a typical run of the mill probate can take anywhere from three to nine months depending on the jurisdiction, and it can take significantly longer than that in some contested cases. The other primary reason why probate is best avoided is the cost involved. Probate involves legal fees, court costs, executor fees, and other expenses that can wind up totaling some 3-7% of the value of the estate. So you could be looking at a loss of $40,000 or so from an estate worth $800,000.
Pay on death accounts are a good way to avoid the pitfalls of probate, and perhaps the best thing about them is their simplicity. All you have to do is open a POD account and name a beneficiary, and this person will assume ownership of the account upon your passing without having to go through probate. This can be done with bank accounts, but brokerage accounts can also be transferred in this manner to avoid probate. A few states, including Missouri, even allow vehicles to change hands through a transfer on death without being subject to probate.
One of primary goals of estate planning is to maximize existing assets, and avoiding probate is a good way of doing that. Payment on death accounts assist in this effort, and they are a very useful component to many plans that are saving people a lot of time and money.
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