A few months ago, a new client came to our Manhattan office after his mother passed away. He was relieved because she had named him as the Payable-on-Death (POD) beneficiary on her significant savings and investment accounts. “At least we can avoid Surrogate’s Court and all the taxes,” he said. He was right about the first part—but dangerously wrong about the second.
This is one of the most common and costly misunderstandings I see in my practice. People spend years setting up POD accounts, also known as Totten trusts, believing they have created a tax-free vehicle for their legacy. While these accounts are effective for bypassing the probate process, they do not sidestep the tax collector. The value of those accounts is included in the decedent’s taxable estate. For many New York families, this can lead to an unexpected and substantial tax bill.
Probate Avoidance Is Not Tax Avoidance
A Payable-on-Death designation is a contractual arrangement with your bank or brokerage firm. It directs that the funds pass directly to your named beneficiary upon your death. Your beneficiary simply needs to present a death certificate and identification, and the assets are transferred. The process is quick, private, and avoids the time and expense of Surrogate’s Court.
This is a valuable benefit. Bypassing probate means avoiding court fees, executor commissions, and the potential for public disputes. But the IRS and the New York State Department of Taxation and Finance do not distinguish between “probate” and “non-probate” assets. Their only concern is the total value of the assets you controlled at death.
Your gross taxable estate includes everything—your home, your retirement accounts, life insurance proceeds, and every dollar held in a POD account. The simplicity of the transfer has no bearing on its inclusion for tax purposes.
How New York Calculates Your Taxable Estate
When we administer an estate, our first job is to create a complete inventory of the decedent’s assets. This includes assets that pass under the will and those that pass outside of it. The sum of these assets is the gross estate.
Both the federal government and New York State have an estate tax, but with very different exemption amounts. The federal exemption is currently over $13 million per person, so most estates do not owe a federal tax. New York, however, has a much lower threshold. For 2024, the New York State estate tax exemption is $6.94 million.
If a person’s gross estate exceeds this amount, the estate owes New York estate tax. A client with a $4 million home, a $2 million IRA, and $1.5 million in POD bank accounts has an estate of $7.5 million. Even though the POD accounts transfer instantly, their value pushes the estate over the exemption threshold, triggering a tax liability.
The legal basis for this direct transfer is found in New York’s Estates, Powers and Trusts Law (EPTL) § 7-5.2. This statute codifies the beneficiary’s right to receive the funds. But it is a property transfer law—it has nothing to do with tax law. The tax code operates under a completely different set of rules.
Income Tax vs. Estate Tax: A Second Point of Confusion
Another layer of confusion involves income tax. When a beneficiary receives the principal from a POD account, that money is generally not considered taxable income. They receive the funds free of any income tax obligation.
However, any interest, dividends, or capital gains the account earns *after* the original owner’s death are taxable income to the beneficiary. For example, if you inherit a $100,000 POD account on March 1st and it earns $500 in interest by the end of the year, you will receive a Form 1099-INT and must report that $500 as income on your personal tax return.
The distinction is critical. The inheritance itself is not income, but the subsequent earnings from that inheritance are.
Are POD Accounts Still a Good Idea?
Despite the tax implications, POD accounts can be a useful tool for certain goals. They provide immediate liquidity to a beneficiary without court delays, which can be critical for covering final expenses or providing support while the rest of the estate is settled.
But they are a blunt instrument. A POD designation offers no flexibility or contingency planning. If your named beneficiary is a minor, has special needs, or is struggling with creditors or a divorce, the funds will be paid to them outright—potentially with disastrous results. You cannot attach conditions or provide for long-term stewardship through a simple bank form.
For more nuanced control over your legacy, a revocable or irrevocable trust is often a more prudent vehicle. A trust allows you to name a trustee to manage the funds, dictate the terms of distribution over time, and plan for unforeseen life events. It provides a framework for true stewardship, not just a simple transfer of cash.
Before relying on POD designations as the cornerstone of your estate plan, you must understand their limitations. A prudent first step is an audit of your assets and beneficiary designations. Our process for new clients often begins with this inventory, mapping assets against New York’s estate tax exemption to determine if a plan aligns with their intentions.
