A payable on death (POD) account is an estate planning instrument that enables a person to leave money to a beneficiary after their passing without the need for probate. A beneficiary is designated on the account, and they can get access to the funds by giving the bank or other organization where the account is housed the original death certificate. The money is not under the executor of the decedent's estate's supervision. There is no restriction on the amount of money or the number of accounts that can be transferred in this manner to beneficiaries. However, before they begin spending any money, recipients should be aware of the possible tax and other repercussions of inheriting a POD account.
Death Income Taxes Due
Because bequests are not considered income, the value of a POD account is often excluded from your taxable income. The bequeathor's last income tax return includes any money received by the POD account before the date of their passing. The estate's income tax return also includes earnings that occurred between the date of death and the beneficiary's assumption of ownership of the account. After that, the beneficiary will be required to pay taxes on any account-related earnings.Inheritance Taxes (POD)
There is no inheritance tax levied by the federal government. If the decedent had property or passed away in one of the six states with an inheritance tax, the beneficiary must pay inheritance taxes at the state level. By 2021, inheritance taxes will be collected in Nebraska, Iowa, Kentucky, Pennsylvania, New Jersey, and Maryland. The tax rates and requirements vary per state. For instance, if a recipient in Nebraska received a $100,000 account and paid an inheritance tax of up to 18%, they might owe the government $18,000. There is some good news, though: the closer a person is related to the deceased, the lower their tax rate will be. Most states completely exempt the surviving spouses from this tax, while a few states also exempt the deceased's children. Beneficiaries who aren't connected to the decedent may pay higher rates, depending on the state.The estate tax
The decedent's probate estate and taxable estate are two distinct things, even though POD accounts avoid probate. Regardless of whether it needs to go through probate to transfer to a living beneficiary, the value of everything owned at the time of death constitutes a taxable estate. The terms in the will or living trust agreements may indicate if a duty to contribute to the payment of any estate tax bills exists if the account owner's estate is sizable enough to be subject to federal or state estate taxes. Although, theoretically, any estate taxes must be paid by the estate, the decedent's personal desires may dictate something different. Generally, most estates are not substantial enough to incur estate taxes. As of 2022, all estate values up to $12.06 million are exempt from the federal estate tax. However, any value exceeding this threshold is subject to the tax. However, there are estate taxes in 12 states and the District of Columbia, and some of them have substantially lower exemption levels. For example, exemptions are simply $1 million in Oregon and Massachusetts. Even if the account wasn't a part of the decedent's probate estate, if the account owner didn't have a will or trust, the laws of the state where they passed away determined whether they were required to contribute to the payment of any estate tax that was owed.Capital gains taxes that are due at death are
When someone inherits something that increases in value and later sells it, the proceeds may be subject to capital gains tax. The basis—the average cost of an asset—and the sales price are the two amounts on which this tax is assessed. The asset's value could be considerably more than the asking price. A hefty tax burden might be the outcome if the discrepancy is substantial. Taxes wouldn't be owed if the asset was sold at a loss. Remember that only a small portion of capital losses may be used to offset taxes, up to the lesser of $3,000 (married filing jointly), $1,500 (married filing separately or single), or the amount on line 21 of Schedule D.Bills owed by the account owner
Technically, as part of the probate procedure, a decedent's debts should be paid from the estate. However, this regulation only applies to debts and obligations in the decedent's sole name. Probate assets may be sold to satisfy creditors. A beneficiary would only have a legal obligation to pay any debt if they were a co-signer on the debt, such as on a credit card or auto loan. A POD account never becomes a part of the probate estate, so the executor of the decedent's estate has no control over it. In some places, state law may also have an impact on the liabilities of an account beneficiary. It might be necessary to execute an affidavit stating that the owner of the POD account had no outstanding debts prior to receiving the money.Questions and Answers (FAQs)
Do POD accounts count as estate assets? Although a POD account is regarded as a component of an estate, the probate procedure does not apply to it. POD accounts won't go through the same court procedure as other assets in a decedent's estate because the probate process will skip them, but they are still regarded as part of the estate for other purposes. POD accounts: Are they taxable? Yes, POD accounts are taxed. POD accounts do not require probate, but taxes may still be due. 6. For instance, even if a portion of the estate's assets are kept in POD accounts, the estate will still have to pay taxes if the deceased person's estate is worth more than $12.04 million when they pass away in 2022.