Payable-on-Death Accounts vs. Trusts: Understanding the Differences

You can use a pay-on-death bank account or a trust to transfer ownership of some of your assets to somebody else or an entity. However, despite this similarity, there are considerable differences between POD accounts and trusts, such as the fact that POD accounts are personal accounts, whereas trust accounts are owned by entities rather than people. You create a trust when you produce a legal trust document, whereas you can create a POD account by verbally providing information to your bank.

Structure

Trusts are legal entities that can own assets such as bank accounts. The term POD account refers to a personal deposit account held at a bank or credit union on which you have named a person or entity as a beneficiary. You can name beneficiaries on other kinds of non-bank accounts such as investment accounts but you only use the term POD when you name bank or credit union deposit account beneficiaries. Investment accounts are titled as transfer-on-death accounts rather than POD.

Beneficiaries

Trusts and POD accounts are both designed to enable you to pass assets to your heirs or other beneficiaries without your money having to pass through probate. On a POD account, your funds are split equally between the named POD trustees. Trust distributions are more complex and you can decide how you want to split your assets. On a POD bank account you can name people, charitable organizations and nonprofit organizations as account beneficiaries. On a trust account you can name a person or any kind of entity as a beneficiary.

Changes

On a POD bank account you retain full ownership of the account until you die, and the Federal Reserve recognizes POD accounts as revocable trusts because you can add or remove beneficiaries at any time.

On a formal trust you can only change your beneficiaries if you have a revocable trust. If you establish an irrevocable trust account, you cannot change your beneficiaries and you cannot transact on any accounts belonging to the trust since you and the trust are completely separate legal entities for tax purposes.

Access

You can have several beneficiaries and several account owners on a trust account, and all of the owners have equal control over the account and equal access to the funds inside the account. With a trust, you must appoint a trustee to handle the account, and that trustee must handle the trust in accordance with the terms of the trust agreement. You can act as trustee of your own revocable trust but you cannot act as your own trustee on an irrevocable trust. When you die, the trustee or successor trustee distributes your assets, whereas with a POD account, your beneficiaries must go to the bank and close the account to access your money.