Payable-on-Death accounts, sometimes called Pay-on-Death or Transfer-on-Death, are increasingly popular with banks and brokerage firms. They offer an easy way to transfer assets after an account owner passes away.
The money in the account automatically goes to the person that the account owner designates. The bank or brokerage does not need to hold the money and deal with the estate administrator. The beneficiary does not need to wait for the probate process to end before getting the money.
The Alabama Media Group explained this fact of life in "The downside of P.O.D.'s."
The biggest problem occurs when people do not really understand what the accounts mean legally. For instance, they will name the intended executor of their estate as the beneficiary of the P.O.D. account in the belief that the executor will then put the money in the estate and distribute it according to a will.
However, the executor is under no legal obligation to give the money to the estate. As the P.O.D. beneficiary the executor would own the money outright.
Another common problem is confusion over what happens when a P.O.D. beneficiary passes away before the account holder. For example, if two people are listed as the beneficiaries and one of them passes away before the account holder, does the entire account go to the sole living beneficiary or does half of it go to the heirs of the deceased beneficiary? That question is difficult to answer because it can depend on state law and the policy of the bank or brokerage.
Before making a P.O.D. part of your estate planning, you should consult with an estate planning attorney to make sure that you understand the implications.
Reference: Alabama Media Group (Feb. 11, 2016) "The downside of P.O.D.'s"