POD vs joint bank accounts

[curlyq]

Jurisdiction

California

My dad and I had a checking acct and a cd acct in joint tenancy at a bank. HE died. I had no problem getting the money and having his name removed.

I want to open a new CD and checking acct, but I have no spouse or kids. I have no will, so If I open the accts in my name only and I die, the money may be lost, unless a cousin of mine flies a claim or suit or whatever the procedure in CALIF is.

My initial idea was to add my cousin, who lives in Oregon, as joint tenant, but I remember reading that I could become responsible for her debts. IF she were in a bad car accident or defaulted on a credit card and a judgment were issued against her, the money in 'our' cd & checking accts would be subject to garnishment.

I then thought of Opening a POD account and putting my cousin as the beneficiary. IF my cousin then had a judgment entered against her, would this type of account, namely POD, be in jeopardy of garnishment? I asked the bank, but got no answer besides a shrug of the shoulders, which shocked me, as I figured that a banker would know.

Thanks

 

[Zigner]

No. A PoD account doesn't confer any ownership rights while you are alive.

 

[curlyq]

--'POD doesn't confer any ownership rights while you are alive'--

GOOD NEWS! I (the cd account) would not be liable for any debts that my cousin, AS POD, incurred, and I would not have to worry about the money being garnished as a result of any judgment against my cousin.

SHE--my cousin--also could not access the money while I am alive, if I understand the principle of the account. I would not wake up 1 morning and find that she cleaned out the acct.

I also am hoping that a POD would enable me to get FDIC insurance for up to 250k for myself and 250k for the person who I list as POD, boosting my coverage to 500k for 1 acct. IS THAT RIGHT? If interest rates were to go up, I might make good money in a hurry and need the full 500k.

 

[adjusterjack]

POD is the safest for you.

And you are right about the FDIC with regard to POD accounts.

However, there is a better way than buying CDs at a bank.

Buy them through an online broker like Fidelity or Schwab. That way you have one POD account and can buy CDs from many banks where each CD is covered up to 250,000.

You can maximize your interest income by laddering the CD purchases so income is generated every month when the CDs mature. Cash buildup is temporarily held in a money market account for government securities.

I'm doing that with Fidelity now. CD rates are 5% to 5.3%.

 

[Tax Counsel]

And you are right about the FDIC with regard to POD accounts.

Actually, no, that's not right. Only an owner of the account is insured. A POD beneficiary does not have an ownership interest until the account holder dies and the account passes to the named beneficiary. As there is only one owner at any given time only up to $250,000 in deposits will be covered.

This one situation in which having the account held jointly would help since there are two owners while both still live, with each owner being covered separately by FDIC insurance. But I wouldn't put a high priority on ensuring the account stays under the FDIC insurance limits. Our economy would have go very sour before you'd need to worry about losing money from the bank account.

When a bank fails, the FDIC steps in and finds another bank willing to accept the responsibility for the deposit accounts in exchange for the money the loans the failed bank had will bring in. The FDIC has so far been very successful at that, with the result that no depositor, regardless of size of the account, has lost a penny of their deposits from a bank failure since the FDIC was established in 1933. That's 91 years of safety for depositors so far. You'd have more risk of the joint account holder clearing out the account than you do losing money from your bank deposits as things are today.

POD is the safest for you.

I agree that the POD is going to be safer than joint ownership of the bank account.

 

[adjusterjack]

Actually, no, that's not right. Only an owner of the account is insured. A POD beneficiary does not have an ownership interest until the account holder dies and the account passes to the named beneficiary. As there is only one owner at any given time only up to $250,000 in deposits will be covered.

From the FDIC website:

For example, a revocable trust account (including living trusts and informal revocable trusts commonly referred to as payable on death (POD) accounts) with one owner naming three unique beneficiaries can be insured up to $750,000.

FDIC: Deposit Insurance FAQs

www.fdic.gov

That's what I was referring to.

 

[zddoodah]

My initial idea was to add my cousin, who lives in Oregon, as joint tenant, but I remember reading that I could become responsible for her debts.

That's not true. However, by putting your cousin as a "joint tenant" on the account, you would be giving her the money in the account. Your cousin would have the legal right to walk into the bank and withdraw 100% of the money at any time. Additionally, any creditor who has a judgment against your cousin could levy on the account. Beyond that, you would NOT "become responsible for her debts."

I then thought of Opening a POD account and putting my cousin as the beneficiary. IF my cousin then had a judgment entered against her, would this type of account, namely POD, be in jeopardy of garnishment?

No, because being a pay-on-death beneficiary is a contingent right. The money in the account is not an asset of the beneficiary as long as the account holder is alive. The most a creditor could do is serve a levy. That would create an execution lien. If I remember correctly, the lien lasts for two years. If you were to die while the lien is in effect, then the creditor would be entitled to the money. It's also theoretically possible that the creditor could obtain a court order substituting the creditor for your cousin as beneficiary. However, that would not give the creditor any present right to the money, and you'd be free to deposit and withdraw money, including closing the account altogether, as you see fit.

 

[curlyq]

THANKS for your thorough answers. IF I understood everything that was presented, then I can

1. add my cousin as beneficiary in a POD account and get $500k FDIC insurance;
2. avoid worrying about my cousin having access to the money WHILE I AM ALIVE;
3. rest assured that I will not lose the money to a creditor who by some unlikely miracle obtains a court order to replace my cousin as beneficiary because I would be free at ALL TIMES to deposit and withdraw money, including closing the account altogether, as I saw fit; in other words, I WOULD still maintain control of ALL of the money in the acct; and
4. investigate an online brokerage to obtain high interest on a POD acct, although I might incur fees and other costs

 

[welkin]

4. investigate an online brokerage to obtain high interest on a POD acct, although I might incur fees and other costs

I can tell you that I have been doing business with Fidelity for 50+ years and have never paid any fees for mutual funds or CDs.

 

[Tax Counsel]

From the FDIC website:

FDIC: Deposit Insurance FAQs

www.fdic.gov

That's what I was referring to.

Fair enough. But that FAQ doesn't fully explain how it works. Under the FDICs view of the financial world, an owner of a bank account with a POD beneficiary is regarded as a trust for its insurance rules. (I think that a bit bizzare but it is what it is). The more full explantion in the FDIC brochure entitled Your Insured Accounts goes on to say how the limits of insurance for a trust are determined. It uses the following formula:

When calculating coverage for Trust Accounts, the FDIC uses the formula:
# of Owners x # of Beneficiaries x $250,000 = Amount Insured (not to exceed $1,250,000 per owner for all trust accounts)

As a result, a bank account with only one owner and one POD beneficiary still only gets up to $250,000 of coverage, as I stated earlier. But the reason why it is limited to that is different, and that matters because in other situations it would not come out the same.

The brochure gives an example with just that situation. It is worth reading the whole trust section, which starts on page 11. I'm pretty sure few bank customers know much at all of exactly how the FDIC insurance works because since the FDIC was established no one has lost money from a deposit when a bank failed. So it's easy to put out of mind and assume a fairly simplistic rule, which I admit is what I did when seeing a very simple statement of coverage on the FDIC site. I should have guessed there was more to it than that.

1. add my cousin as beneficiary in a POD account and get $500k FDIC insurance;

Unfortunately no, for the reasons I explained above. The limit will still be $250,000 if you own the account and have just a single beneficiary.

 

[curlyq]

---Unfortunately no, for the reasons I explained above. The limit will still be $250,000 if you own the account and have just a single beneficiary---

OKAY, as I am the only owner, I guess that 1 owner x 250 k = 250k FDIC insurance and the presence of a Beneficiary is MOOT.

THANKS. YOU certainly were right that 'I'm pretty sure few bank customers know much at all of exactly how the FDIC insurance works.' THE bankers online and at my local branch DO NOT EVEN KNOW THE RULES

 

[adjusterjack]

OKAY, as I am the only owner, I guess that 1 owner x 250 k = 250k FDIC insurance and the presence of a Beneficiary is MOOT.

That makes a brokerage account attractive where you can buy numerous CDs from separate banks and each CD will be protected up to $250,000.

 

[curlyq]

IF a brokerage acct allows me to buy numerous cds and get the FULL FDIC insurance, as you said, without having to fill out the endless paperwork repeatedly, then it really is attractive