In a recent Colorado Court of Appeals case, the estate of a loan borrower and his Payable on Death (POD) Certificate of Deposit (CD) pledged to secure the loan both had to contribute to the loan payoff. In re Estate of Trevino, 474 P.2d 223.

The decedent borrowed from Wells Fargo Bank jointly with his wife. To secure the loan, he also pledged a POD CD.  

At his death, the decedent then left his estate to his wife and named her the personal representative to administer it. The POD CD was payable to his son. The widow, as personal representative of the decedent's estate, directed the lender Wells Fargo Bank to pay the loan in full from the POD CD, and none was paid from the Estate or the widow’s own funds.

The terms of the pledge of the POD CD provided that neither the TOD beneficiary nor the decedent's estate gets any rights in the collateral CD until the loan obligation is paid in full. The Court did not accept that as the final answer, however. Rather, they determined that the Estate's Personal Representative was in the best position to determine how much of the POD CD should be used to satisfy the loan. Under Colorado law, the Personal Representative had a duty to all beneficiaries, to all interested persons, and to the decedent's creditors.

Even though agreeing that she had this power, the Court ruled that she breached her duty to exercise her powers in a neutral fashion and in the best interests of all beneficiaries and intended persons.  This meant that she should have first paid the loan with liquid funds in the Estate, and only paid the rest of the loan from the POD CD.

The Court expressly stated that it was not ruling on the son's right to contribution or to pursue a claim of unjust enrichment against the widow. She too was personally liable on the loan. Apparently, the son had not asserted such claims in his suit.

POD statutes around the country have varying approaches to the rights of creditors. The Oklahoma statute only gives the POD beneficiary the net proceeds remaining after the payment of any secured party with a valid security interest. Ohio courts have held that the creditor has an immediate right to satisfy the debt from the POD proceeds without first seeking payment from the decedent's estate. 

The Kentucky POD statute takes a different approach. KRS 391.355 generally gives the creditor of any party to a multi-party account the right to set off the debt against the portion of the account to which the deceased party was entitled immediately before death, subject to any contractual provision. Indiana’s POD statute is almost identical to Kentucky’s “set-off’ provision; however, a separate Indiana statute applies further liability to a POD beneficiary. In accordance with IC 32-17-13-2, a POD beneficiary is liable to the deceased transferor’s probate estate for allowed claims against the estate and the statutory allowances to the decedent’s spouse and children, to the extent the decedent’s probate estate is insufficient to satisfy such claims and allowances. Thus, even if not pledged, the POD proceeds could still be used to satisfy claims and family allowances exceeding the probate estate’s value, leaving little finality in the receipt of the POD proceeds until the end of Indiana’s claim period after death.