Designating beneficiaries of pay-on-death accounts in Colorado
Colorado enacted new legislative changes concerning distributions to beneficiaries of amounts on deposit in pay-on-death (POD) accounts at financial institutions. Upon the death of the sole or last account holder of a POD financial account, the new law permits the non-equal distribution of funds from accounts that have two or more beneficiaries.
Prior law required that accounts with POD designations naming two or more beneficiaries must be paid to the surviving beneficiaries in equal shares. The account owner could not legally designate different proportions for each beneficiary.
The new law provides that funds may be distributed to the beneficiaries in the proportions specified in the written designation kept on file in the records of the financial institution. If no proportions are specified, the funds are evenly divided between the beneficiaries.
What if a beneficiary predeceases the account owner?
If there are two or more beneficiaries, and a beneficiary predeceases the account owner, the designation goes back to equal distribution unless the POD designation is changed by the account owner to state otherwise. As under prior law, if none of the designated beneficiaries survive the account owner, sums remaining on deposit belong to the estate of the last surviving account owner.
Some pros and cons
POD accounts can be a useful alternative used in estate planning since they generally permit bank account assets to avoid probate. After the account holder’s death, such funds can be distributed to the beneficiaries designated by the account owner outside probate. Beneficiaries have no rights to the money during the account owner’s lifetime. Beneficiary designations on POD financial accounts also take precedence over conflicting provisions of a will.
One possible disadvantage to allowing non-equal distributions of POD account designations is that it could give rise to disputes among the beneficiaries. Litigation could result to resolve claims regarding the intent of the account owner or the validity or the correct interpretation of the account owner’s distribution instructions.
Even so, because the POD account skips probate, any challenges could only come from other beneficiaries on that specific account. The estate itself could have dozens of potential beneficiaries, but if only two people are named on the POD account, only those two could contest the distributions. These challenges certainly could occur, but they should be less complex than other estate issues.
Another benefit of using a POD account is that the transfer can happen relatively quickly. If there are no challenges or if only one beneficiary is named on the account, then they may gain access to that account long before probate has concluded. The probate process itself can take months, and it may take weeks for the estate executor to simply distribute paperwork and inventory the assets. However, the POD account is separate from all of that, so the transfer can be quick.
As a result, these accounts are sometimes used as a fast way to pass money to beneficiaries who may be facing many costs. After all, the passing of a loved one can be expensive, bringing up funeral and burial costs, along with much else. The estate executor may have to devote a significant amount of time to administering the estate and ensuring that everything is handled correctly. A POD account can help to streamline this process and take some of the financial pressure off of beneficiaries while the bulk of the estate goes through probate and gets divided in accordance with the estate plan.
One final benefit of a POD account is that, even though the beneficiary does not get control of the funds until the account holder passes away, the two can have conversations about how that account has been established. This can help to set expectations because the beneficiary knows that they will have access to those funds. It can also reduce the odds of disputes because having these conversations in advance gives the beneficiary or beneficiaries a chance to talk with the original account holder about their plans and clear up any misconceptions or disputes.
Effective date
The new law was signed and took effect on March 29, 2013, and affects all accounts containing the POD designation, created before, or on, or after March 29, 2013.
Estate planning can be a complex process and state and federal laws affecting estate planning are subject to frequent changes. Individuals desiring assistance in these matters should consult with an experienced estate planning attorney who stays current in this field in order to ensure that it is done correctly.