One of our customers has payable on death (POD) accounts that list her children as beneficiaries. She has requested that we add what her attorney calls a “right of representation” to the POD accounts. In other words, if one of her children predeceases her, she wants that parent’s POD account distribution to be given to her grandchildren per stirpes. Is that permitted? How would I title the accounts? (In this case, with a per stirpes distribution, if a named beneficiary predeceases the POD account owner, the customer wants the then-living descendants of that beneficiary to receive equal shares of that beneficiary’s share when the account owner dies.)

We believe that a POD account can be distributed by “right of representation,” if this intent is made clear in the account agreement with your customer (beyond simply adding “by Right of Representation” to the account title). While this type of distribution for a POD account is unorthodox and could pose some remote risk to your bank, we think this risk can be largely mitigated.

As explained in the FDIC Trust Examination Manual, a distribution by “right of representation” (originally known as “per stirpes”) results in a distribution “to persons as members of a family (per stirpes) and not as individuals (per capita).” In other words, your customer intends for her POD accounts to be proportionately divided among her then-living grandchildren based on their predeceased parent’s share (if that occurs), rather than the predeceased parent’s share being evenly distributed among the remaining living beneficiaries of that account.

In general, the Illinois Trust and Payable on Death Accounts Act (“POD Act”) requires depository institutions to distribute POD account funds to living beneficiaries as tenants in common with equal shares. When a beneficiary predeceases the account owner, the POD account funds are to be equally distributed to the remaining living beneficiaries upon the account owner’s death, rather than to the predeceased beneficiary’s estate or descendants.

However, the POD Act permits this general rule to be altered by a written agreement between the bank and its customer. In this case, we recommend customizing your account agreement to clearly memorialize your customer’s intent. Your amended (or new) account agreement should attempt to clarify any questions that might arise when your bank is distributing the POD account funds, such as whether your customer intends to also include her great-grandchildren as beneficiaries, if any exist when she dies.

Even with a written agreement in hand, there could be open questions about account distributions after your customer dies. Per stirpes instructions in wills and trusts have resulted in disputed claims and litigation under a variety of facts over the years, such as when an unknown or unacknowledged descendant of a predeceased beneficiary appears after the settlor’s death. In other words, there could be some remote risk of conflicting claims after your customer dies.

Fortunately, the POD Act protects depository institutions from possible objections about POD account distributions in two ways. First, the POD Act permits banks to refuse to distribute a POD account until all beneficiaries have provided a “written direction” to the bank that accepts the bank’s proposed distributions. Second, if beneficiaries or putative beneficiaries make conflicting claims on a POD account’s funds, the POD Act permits your bank to “refuse to distribute the proceeds, without liability to any beneficiary or other party, until the institution receives a determination of ownership by a court of appropriate jurisdiction.”

We also recommend taking advantage of these protections when the account owner dies, by requiring written directions accepting your proposed distributions from all of the then-living beneficiaries, and if any beneficiary or anyone else objects to or makes a conflicting claim on the proposed distributions, by also requiring a court order for the distributions from that account.

For resources related to our guidance, please see:

FDIC Trust Examination Manual, Glossary (“Per Stirpes (By the branch): A term used in the distribution of property; distribution to persons as members of a family (per stirpes) and not as individuals (per capita). Two or more children of the same parent take per stirpes when together they take what the parent, if living, would take. For example, ‘I give my estate to my son A and to my grandsons C, D, and E (the sons of my deceased son B). My grandsons are to take per stirpes.’ C, D, and E take as the sons of B (not as individuals), each receiving one-sixth of the estate (one-third of the one-half to which B would be entitled if living), while A receives one-half of the estate. Taking per stirpes is also known as taking by right of representation.”)

Illinois Trust and Payable on Death Accounts Act, 205 ILCS 625/4 (“If one or more persons opening or holding an account sign an agreement with the institution providing that on the death of the last surviving person designated as holder the account shall be paid to or held by one or more designated beneficiaries, the account, and any balance therein which exists from time to time, shall be held as a payment on death account and 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, unless more than one beneficiary is so designated and then living or in existence, in which case those beneficiaries shall hold the account in equal shares as tenants in common with no right of survivorship as between those beneficiaries. If no beneficiary designated as the owner of the account on the death of the last surviving holder is then living or in existence, the proceeds shall vest in the estate of the last surviving holder of the account.”)

Illinois Trust and Payable on Death Accounts Act, 205 ILCS 625/10 (“Upon the death of the last surviving trustee or holder of the account, the institution that maintains the account shall distribute the proceeds to the beneficiary or beneficiaries designated in the agreement controlling the account without further liability. No institution, however, shall be required to distribute the account proceeds until the institution receives (i) legal evidence of death of all trustees or holders of the account, (ii) identification from each beneficiary then living, or business records evidencing the lawful existence and parties authorized to collect on behalf of each beneficiary not a natural person, and (iii) written direction from each beneficiary to close the account and distribute the proceeds in a form acceptable to the institution. If the institution, in its discretion, is unable to identify one or more beneficiaries, or cannot determine the lawful existence of any beneficiary, or cannot determine a party authorized to collect on behalf of any beneficiary, or if conflicting claims to the account are made by the beneficiaries or other interested parties, then the institution may refuse to distribute the proceeds, without liability to any beneficiary or other party, until the institution receives a determination of ownership by a court of appropriate jurisdiction.”)