A Transfer on Death (TOD) account is a way to have accounts pass to beneficiaries immediately upon death. There are situations where this simple solution can work, and others where it creates a lot of headaches for families.
With an estimated 57% of Americans not having a will, a TOD account seems like a reasonable solution. What could go wrong? Your assets will pass to whoever you name as the owner upon your death. However, a TOD won’t keep your entire estate from needing to be probated if there is no will, just that one account.
Yahoo Finance’s recent article, “Transfer on Death (TOD) Accounts for Estate Planning” explains that a transfer on death (TOD) account automatically transfers its assets to a named beneficiary when the holder dies. TOD account holders can designate multiple beneficiaries and divide assets any way they want. However, the beneficiaries have no rights to a TOD account, while its owner is alive. The beneficiaries can also be changed at any time.
When a person with a TOD account dies, the executor will deliver a copy of the death certificate to an agent at the account’s bank or brokerage. The account is re-registered in the beneficiary’s name. A TOD account sidesteps the probate process and takes precedence over a will.
If you have a surviving spouse as your joint owner, investment and bank accounts will go to them before going to a TOD account beneficiary. Based on state law, a beneficiary may receive the assets of a TOD account, only after a joint owner spouse’s death, if at all.
A TOD account can be divided between several beneficiaries, but it doesn’t have to be done so equally. A TOD account with someone under 18 as a beneficiary, could also be a problem because minors can’t control investment accounts. You would need to name a guardian or set up a trust (and name a trustee).
However, distributing assets is only one part of an estate plan. The TOD account won’t do you or your beneficiaries any good, if you become incapacitated and unable to make financial decisions. It also won’t help when you are incapacitated and someone needs to make health care decisions on your behalf.
Passing assets to beneficiaries is part of a comprehensive plan that starts with planning to protect yourself and your spouse while you are alive. That means a power of attorney for financial decisions and a health care power of attorney for medical decisions. You should then address how you want your assets to be distributed. Don’t forget to include tax planning, so that taxes don’t take too much of a bite out of your estate. Finally, what do you want your legacy to be? An appointment with an estate planning attorney will help protect you while living and after death. It’s a worthwhile effort, for you and for your loved ones.
Reference: Yahoo Finance (June 26, 2019) “Transfer on Death (TOD) Accounts for Estate Planning”