Payable on Death Bank Accounts

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Payable on Death bank accounts have become increasingly popular as a means to avoid probate over the last few years. This rise corresponds in no small part to their popularity on various internet forums. Anything that’s “easy” and can avoid probate must be good, right? Let’s examine these accounts in more detail.

Payable on Death bank accounts: the basics

New York state law allows you to designate certain types of accounts, including bank checking, savings, and CD, as “payable on death.” Upon your death the Payable on Death beneficiary (or beneficiaries) obtains access to the money in the account without having to go through probate.

A Payable on Death bank account does not grant the payable on death beneficiary with any right to the money while you are alive. You can do with your money as you please. You can also remove or change the payable on death beneficiary anytime you wish. Upon your death, by providing valid identification and proof of your death, the Payable on Death beneficiary will have access to the funds as if they have always belonged to them.

Payable on Death bank accounts: some problems

The above makes Payable on Death bank accounts sound great.  What’s the problem?  These accounts are simple to put in place and seem to accomplish the goal of keeping your beneficiary out of probate.

Some issues with Payable on Death bank accounts are:

  1. Risk in a remarriage situation. Let’s assume that a husband and wife in a remarriage situation have a joint bank account. The account is structured so that it becomes Payable on Death only after both the husband and wife die. Let’s also assume that the Payable on Death beneficiaries are their two respective children from each of their prior marriage. The wife dies first. The risk is that the husband changes the Payable on Death beneficiaries to only his two children thereby disinheriting his deceased wife’s biological children.
  2. Further risk in a remarriage situation. We’ll keep the fact pattern the same as number 1 above but now the husband remarries a 3rd spouse.  He decides to change the Payable on Death Beneficiary to his new wife. He has now effectively disinherited his deceased second wife’s children and his own!

There’s a lot that can go wrong in a remarriage situation either intentionally or simply by not understanding how Payable on Death bank accounts really work.

  1. Incapacity and Payable on Death Bank Accounts. If the account owner of the Payable on Death account becomes mentally incapacitated it may be necessary to go to court for someone to obtain access to the account. A Payable on Death bank account is what it sounds like: only payable on death. Incapacity, without other estate planning being in place, will require guardianship for a minor or conservatorship proceedings before someone can access the account.
  1. Payable on Death Bank Accounts and Minor Beneficiaries.  If the beneficiary of the Payable on Death Account is under the age of 18 in New York, and therefore a minor, court proceedings will be necessary to appoint someone to manage the money on the minor’s behalf.
  1. Payable on Death Bank Account beneficiaries die before the account owner.  Naming beneficiaries of a Payable on Death Bank Account is one of those things people do and then forget about. They fail to revisit and update the beneficiary designations. If the Payable on Death beneficiaries all die before the account owner the bank account will need to go through probate to determine the rightful owner.

Like many things made popular in Internet forums Payable on Death Bank Accounts have major issues and do not, in and of themselves, serve as a comprehensive estate plan. They do have their purpose as part of an overall comprehensive estate plan but they are not the panacea some would have you believe.