United States: P.O.D. Accounts Restricting Bank's Right Of Setoff

Banks generally have a right of setoff against funds they maintain on deposit in a customer's account that can be used to satisfy any obligations owed to the bank by that customer. This setoff right might come from common law or from a contractual provision in a deposit account agreement or other contract. There are few limits on a bank's right of setoff other than "mutuality of obligation," the result being that lenders are comfortable when individual debtors have accounts with substantial balances at the bank. While some banks may try to take a pledge and security interest in the deposit account, that is often not the case.

However, as evidenced by the cases described below, and by legislation enacted in Oklahoma and Texas, there is one type of deposit account that can pose a major issue for a bank seeking repayment of a loan following the death of a customer. "Payable on death" accounts, commonly known as "P.O.D. Accounts," are an increasingly common estate planning tool used by many individuals to avoid the hassle and expense of probate. Most state laws permit the designation of a deposit account as a P.O.D. Account. When a P.O.D. Account owner dies, the funds in the account transfer without probate to the P.O.D. beneficiary. A P.O.D. beneficiary designation is absolute; even if a will or living trust of the decedent gives the decedent's assets to a different beneficiary. Wis. Stat. § 705.04(3). The funds in the P.O.D. Account go to the beneficiary named on the P.O.D. Account, and not to the decedent's estate, unless the decedent's estate is designated as the P.O.D. beneficiary.

What if the deceased account holder owed the bank money? While a bank may think that its right of setoff applies before the money in the account is paid to the P.O.D beneficiary, in Wisconsin, that thought would be incorrect. Any money in the P.O.D. account is transferred by right to the beneficiary immediately upon the death of the account holder, eliminating any right the bank had to setoff, since there is no longer the required "mutuality of obligation" between the parties. For example, consider a situation where Holder A has a P.O.D. account that contains $250,000 and also has $100,000 outstanding on a personal unsecured loan from the same bank. When Holder A dies, the bank loses all right of setoff and the $250,000 immediately becomes the property of the P.O.D. beneficiary. The bank then is stuck with only one option; it must go after Holder A's estate for the money due under the loan. If there is no estate, the bank could lose completely.

This situation is not just theoretical. In 2010, the Wisconsin Supreme Court held that P.O.D. Accounts passed to the named beneficiary upon the decedent's death, free of estate tax. In this case, a P.O.D. beneficiary received almost $4,000,000 upon the death of the P.O.D. Account holder, and, as intended, the money bypassed the estate. The estate sued the beneficiary for reimbursement of federal and estate taxes generated by the P.O.D. account, but the Court found that obligation to pay the estate taxes fell solely on the estate. In other words, the decedent's estate was required to pay all estate tax due upon the decedent's death, including estate tax attributable to the P.O.D. Accounts. Estate of Sheppard ex rel. McMorrow v. Schleis, 2010 WI 32, 324 Wis. 2d 41, 782 N.W.2d 85.

As you can imagine, P.O.D Accounts are increasingly being used by estate planners to increase the money that goes to their client's beneficiaries and reduce the difficulties and costs of probate. Although an unintended consequence, this planning strategy is leaving creditors vulnerable and exposed, as they likely expected to be repaid from the funds on deposit.

Some states, such as Texas, Ohio and Oklahoma, have taken measures to protect lenders in these types of situations as more fully described below. We expect that other states would be responsive to state financial institution lobbies requesting changes to their deposit account laws to protect depository institutions that allow their customer's to open and designate P.O.D. Accounts.

At the request of the state bankers' association, Texas enacted a statute that allows banks to setoff against a P.O.D. Account the amount due under a loan, prior to the payout of any account balance to the P.O.D beneficiary. Tex. Est. Code, § 113.210. Additionally, Oklahoma enacted a statute that requires any party with a secured interest in a P.O.D Account to be paid off before the money goes to the beneficiary. Okla. Stat. tit. 6, § 901.

Although not a legislative change, the Ohio Supreme Court previously held that a bank had a right to exercise setoff before paying the P.O.D. beneficiary when the owner of a P.O.D Certificate of Deposit pledged such Certificate as collateral for a loan. The court reasoned that the beneficiary's interest was only as great as the account holder's interest. Since the account holder's interest was subject to the bank's rights to collateral, the beneficiary's interest was also subject to that right. Jamison v. Soc'y. Nat'l. Bank, 66 Ohio St. 3d 201, 611 N.E.2d 307, 309 (Ohio 1993).

Unfortunately, Wisconsin has yet to provide any assistance to lenders on this issue. Chapter 705 of the Wisconsin Statutes, which includes coverage of P.O.D. Accounts and "how they work," makes no concessions. Ideally, Wisconsin would consider a statute similar to Texas and Oklahoma that assures that bank lenders can protect their interests before a P.O.D. beneficiary can take his or her stake of the account funds at the time of death.

Banks need to be vigilant and consider how P.O.D. Accounts will affect its security in, or repayment of, their loans. While almost all deposit account agreements contain provisions on a bank's right of setoff, few have included provisions that contemplate the issues identified in this article. Further, in our experience, banks rarely require binding pledges or grants of security interests for their deposit customers. However, some of the larger money-center banks are already hedging against this risk in their agreements. For example, a large, well-known bank has a provision in its agreement that states:

"[W]e are authorized to exercise our right of setoff or security interest rights against the funds credited to your balance after your death. We have these rights even if a "payable on death" payee has rights to the account."

However, without judicial guidance, it's unclear whether such a provision in an account agreement can trump the provisions of existing state law. Even so, this is a provision that every bank should consider including in its deposit account agreements. As estate planners increase their use of P.O.D. Accounts as a strategic tool, banks may be left with a false sense of security and uncollectible loans.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions