IBA Compliance Connection

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A customer with a payable on death (POD) checking account has died, and we have not yet closed the account. The POD beneficiary is waiting to receive insurance checks for storm damage to the deceased customer’s home that occurred while she was still alive. The insurance company said that the checks will be made payable to the deceased customer. Can the POD beneficiary deposit these checks into the POD account once she receives them, or will she need to provide us with a small estate affidavit?

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No, we do not believe that the beneficiary — and now owner — of a POD account may deposit checks made payable to the prior owner, and we do not believe a small estate affidavit would protect you from potential liability.

Under the Illinois Trust and Payable on Death Accounts Act, unless otherwise agreed, the POD beneficiary became the owner of the POD account immediately on your customer’s death. By depositing a check into the account of someone other than the named payee without the payee’s endorsement — and after learning of the payee’s death — your bank would be putting itself at risk for a claim of conversion by the payee (or in this case, the payee’s estate administrator or executor) if they dispute that they consented to the deposit.

Further, under the Illinois Uniform Commercial Code, your bank could be liable to the payor bank for presenting the insurance company’s checks for payment without the named payee’s endorsement. When your bank presents a check to a payor bank for collection, your bank warrants that it is entitled to enforce the check, which “in effect is a warranty that there are no unauthorized or missing indorsements.” By presenting checks without your deceased customer’s endorsement, your bank would be putting itself at risk for a claim of a breach of its presentment warranties by the payor bank.

We do not believe obtaining a small estate affidavit from the POD beneficiary would protect you from potential liability for accepting these checks. A small estate affidavit directs a person, corporation, or financial institution “indebted to or holding personal estate of a decedent . . . to pay the indebtedness . . . in the manner specified in the affidavit.” As your financial institution is not indebted to the decedent for the insurance checks, a small estate affidavit would not protect you from liability for accepting the checks. Additionally, depositing the insurance checks could raise the value of the deceased customer’s estate over the $100,000 threshold for use of a small estate affidavit.

Because we do not recommend accepting the insurance checks for deposit, you may wish to suggest alternatives to the POD beneficiary. For example, we believe the POD beneficiary could provide the small estate affidavit to the insurance company and ask that the checks be reissued in their name. Also, if the POD beneficiary is named the executor or administrator for your deceased customer’s estate, they could deposit the checks into an estate account or their personal account after endorsing them as your deceased customer’s fiduciary, in which case we believe that your bank would be protected from any potential liability under the Fiduciary Obligations Act.

For resources related to our guidance, please see:

  • Illinois UCC, 810 ILCS 5/3-417(a)(1) and 810 ILCS 5/4-208(a)(1) (“Presentment warranties. (a) If an unaccepted draft is presented to the drawee for payment or acceptance and the drawee pays or accepts the draft, (i) the person obtaining payment or acceptance, at the time of presentment, and (ii) a previous transferor of the draft, at the time of transfer, warrant to the drawee making payment or accepting the draft in good faith that: (1) the warrantor is or was, at the time the warrantor transferred the draft, a person entitled to enforce the draft or authorized to obtain payment or acceptance of the draft on behalf of a person entitled to enforce the draft . . . .”)
  • UCC § 3-417 cmt. 2 (“Subsection (a)(1) in effect is a warranty that there are no unauthorized or missing indorsements.”)
  • Illinois Trust and Payable on Death Accounts Act, 205 ILCS 625/4(c) (“ . . . unless otherwise agreed in writing between the person or persons opening or holding the account and the institution: . . . (c) Upon the death of the last surviving holder of the account, the beneficiary designated to be the owner of the account . . . shall be the sole owner of the account. . . .”)
  • Illinois UCC, 810 ILCS 5/3-420(a) (“The law applicable to conversion of personal property applies to instruments. An instrument is also converted if it is taken by transfer, other than a negotiation, from a person not entitled to enforce the instrument or a bank makes or obtains payment with respect to the instrument for a person not entitled to enforce the instrument or receive payment. An action for conversion of an instrument may not be brought by (i) the issuer or acceptor of the instrument or (ii) a payee or indorsee who did not receive delivery of the instrument either directly or through delivery to an agent or a co-payee.”)
  • Illinois Probate Act, 755 ILCS 5/25-1(a) (“When any person, corporation, or financial institution (1) indebted to or holding personal estate of a decedent . . . is furnished with a small estate affidavit in substantially the form hereinafter set forth, that person, corporation, or financial institution shall pay the indebtedness . . . in the manner specified in the affidavit or to an agent appointed as hereinafter set forth.”)
  • Illinois UCC, 810 ILCS 5/4-405(a) (“Neither death nor incompetence of a customer revokes the authority to accept, pay, collect, or account until the bank knows of the fact of death or of an adjudication of incompetence and has reasonable opportunity to act on it.”)
  • Fiduciary Obligations Act, 760 ILCS 65/1 (“‘Fiduciary’ includes a trustee under any trust, expressed, implied, resulting or constructive executor, administrator, guardian, conservator, curator, receiver, trustee in bankruptcy, assignee for the benefit of creditors, partner, agent, officer of a corporation, public or private, public officer, or any other person acting in a fiduciary capacity for any person, trust or estate.”)
  • Fiduciary Obligations Act, 760 ILCS 65/4 (“If any negotiable instrument payable or indorsed to a fiduciary as such is indorsed by the fiduciary, or if any negotiable instrument payable or indorsed to his principal is indorsed by a fiduciary empowered to indorse such instrument on behalf of his principal, the indorsee is not bound to inquire whether the fiduciary is committing a breach of his obligation as fiduciary in indorsing or delivering the instrument, and is not chargeable with notice that the fiduciary is committing a breach of his obligation as fiduciary unless he takes the instrument with actual knowledge of such breach or with knowledge of such facts that his action in taking the instrument amounts to bad faith. If, however, such instrument is transferred by the fiduciary in payment of or as a security for a personal debt of the fiduciary to the actual knowledge of the creditor, or is transferred in any transaction known by the transferee to be for the personal benefit of the fiduciary, the creditor or other transferee is liable to the principal if the fiduciary in fact commits a breach of his obligation as fiduciary in transferring the instrument.”)
  • Crawford Supply Group, Inc. v. LaSalle Bank, N.A., 2010 U.S. Dist. LEXIS 4691, *19–*20 (“As the Illinois cases demonstrate, an allegation that a fiduciary made deposits into his personal accounts–either by depositing checks payable to himself as a fiduciary or checks made payable to a principal and endorsed by the fiduciary–is insufficient to state a claim that can survive the Fiduciary Obligations Act.”)