Allowing Contingent POD on a CD: Is this wise?

Question:

I realize that deposit accounts are governed by state law, however, I'd like to pose this scenario and get your opinion. We have a customer who requested a "contingent POD" on his CD. Researching Tennessee law, I found nothing that would disallow this, but are there any issues here that we might encounter problems with in doing this?

Answer:

My understanding is, your customer wants a time deposit that reads "Mary Beth, POD Lucy, but if Lucy does not survive her, POD Ken".

You are right, Tennessee law does not prohibit the language. However, here, it is wise for your institution to reframe the question as "Does Tennessee law provide for it?" It does not.

Many states allow bank accounts to pass according to their terms on the death of the owner. Their statutes create a specific exception to the general requirement that a will is necessary to pass property at death; without such a statute, the only way to transfer the account would be by will.

The problem is that exceptions are always strictly construed; i.e. courts are generally unwilling to add language. If the decedent's estate wants to challenge the delivery of the funds to Ken, it has a madetoorder lawsuit in the fact that the statute does not mention a contingent beneficiary. The deposit can be tied up on the death of the owner and the bank will be named a party to the suit (particularly if it has already paid out the funds to Ken).

In short, if the statute does not specifically provide for account title requested, it is unwise for the bank to follow the customer's wishes. First, the bank is not in a position to assure the customer that the language will work. Second, the bank may buy itself a lawsuit where there is no potential that anything will be awarded to the bank.

First published on BankersOnline.com 3/11/02