The Drawbacks of Using Joint and POD/TOD/ITF Bank Accounts to Avoid Probate

Probate is the legal process used to prove a will is valid in order to distribute a deceased person’s assets. It can be a drawn out and expensive process especially in New York, so it’s understandable that most people want to learn how to avoid probate.

Using joint accounts, or, alternatively, payable on death accounts (POD), transfer on death (TOD) accounts, or “in trust for” (ITF)/Totten accounts, is a common way to avoid probate.

businessman and lawyer consult having team meeting with client

Before we explain why—and uncover some of the drawbacks of these accounts—here are some important definitions:

Joint account: A bank account held by more than one person (e.g., a married couple). Each account holder has the right to deposit and withdraw funds. If one person dies, the other person has the same access to the funds as before.

Payable on Death (POD): Used to designate beneficiaries for bank or credit union accounts. When the account owner dies, assets are immediately transferred to beneficiaries. Creditors can come after funds in a POD account.

Transfer on Death (TOD): Similar to payable on death accounts, except TODs are usually used to designate beneficiaries for investment accounts like 401(k)s and IRAs; they can also be used for brokerage accounts, stocks, bonds, and even real estate and bank accounts in some states.

Totten/In Trust For (ITF) accounts: This designation is more common with older bank accounts. “In trust for” means the person listed as the beneficiary will gain immediate control of the account once the account owner dies, without needing to go through probate. Creditors typically cannot come after assets in an ITF/Totten account.

Drawbacks of Using Joint Accounts

While a joint account can help you avoid probate, it’s not without its drawbacks. Here are a few:

Lawsuit exposure: If one of the owners of a joint account is sued, the funds in the account can become subject to a judgment lien; this could potentially jeopardize some or all the assets in the account.
Gift tax issues: If the original account owner adds a new owner (e.g., an adult child) and that person doesn’t contribute anything to the account, the IRS may see this as a gift, subject to gift taxes. Money gifts of $15,000 or less are not subject to taxation; anything above this amount may be must be reported to the IRS on a gift tax return (IRS Form 709). There may also be gift taxes at the state level.
Disinheriting other beneficiaries: If the original owner of the account fails to add all beneficiaries to the account that they want to receive an equal share, they will have effectively disinherited those beneficiaries.

Drawbacks of Using POD, TOD & ITF/Totten Accounts

Payable on death accounts, transfer on death accounts, and in trust for/Totten accounts are all ways to designate one or more beneficiaries to your bank and investment accounts, stocks and bonds, and real estate after you die.

Like joint accounts, these types of accounts can help you avoid probate, and, like joint accounts, they also have their disadvantages, including:

Disinheriting other beneficiaries: As with joint accounts, if the owner of an investment account or of real estate fails to designate all beneficiaries they want to inherit the account/property, with POD, TOD, and ITF/Totten accounts they will have effectively disinherited those beneficiaries; this is why it’s critical to keep beneficiary information up to date.
Death of a beneficiary: If the sole beneficiary on an account/real estate deed dies, the account owner cannot designate another beneficiary; rather, the account will become part of the owner’s estate and will be subject to probate. If there are multiple beneficiaries and one of them dies before the owner, it can be difficult figuring out how much the other beneficiaries receive.

last will and testament with 100 dollar, transfer certificate and key

Get Expert Help with Estate Planning and Administration

Careful planning now can help you avoid the lengthy, expensive, and often frustrating probate process down the line.

Joseph A. Ledwidge PC is an expert New York probate attorney representing executors, fiduciaries, heirs, beneficiaries, and other interested parties. He and his associate counsel have 32 years of combined experience and can help you avoid probate through skilled use of trusts and other means.

Call us for a no-obligation consultation today at (718) 276-6656.

Leave a Comment

Your email address will not be published. Required fields are marked *