Colorado Court Case Highlights Need for Caution with Pay-on-Death Accounts

Jim Flynn, a Colorado attorney and business columnist, says a recent Colorado Court of Appeals ruling points up a risk that can lurk in pay-on-death (POD) accounts if they are not monitored adequately. POD accounts are typically used to designate a direct transfer of funds, such as in a bank or brokerage account, to a named beneficiary, without needing any probate proceedings. So when you die, your interest in a POD account automatically goes to your named beneficiary. While still living and cognitively competent, you can change this POD beneficiary, or just delete it, without the beneficiary’s permission. But do not forget that if your wealth transfer intentions change and you do not change the POD beneficiary, that POD stipulation remains in place. Now about that Colorado Court case. A Colorado man had made a romantic partner of his (we’ll call them Cecil and Julia) the POD beneficiary on his bank account that held $165,000. The relationship ended, and at that point Julia and Cecil entered a “settlement agreement” by which they each released the other from all claims using what Flynn described as “broadly stated language.” But Cecil did not formally revoke his POD instruction on the account. When Cecil later died, Julia claimed the bank account money, but Cecil’s daughter contested that because she (the daughter) was a primary named in Cecil’s will. She argued the settlement agreement between Cecil and Julia had terminated the POD stipulation. A trial court initially agreed with the daughter, but the Court of Appeals did not and ruled that Julia was entitled to the bank funds. Flynn pointed out that if Cecil and Julia had actually been married (they were not) and had gotten a divorce rather than doing a settlement agreement, Cecil’s daughter would have gotten the bank funds because a Colorado statute says divorce terminates “all rights to inherit from a former spouse, including a right coming from a pay-on-death designation.”

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