The Pros and Cons of Transfer On Death (TOD) Accounts

What Is Transfer on Death?

The transfer on death designation lets beneficiaries receive assets at the time of the person’s death without going through probate. This designation also lets the account holder or security owner specify the percentage of assets each designated beneficiary receives, which helps the executor distribute the person’s assets after death. With TOD registration, the named beneficiaries have no access to or control over a person’s assets as long as the person is alive.

Key Takeaways Transfer on death applies to certain assets that have a named beneficiary. The beneficiaries (or a spouse) receive the assets without having to go through probate.Beneficiaries of the TOD don't have access to the assets prior to the owner's death.In order to initiate a TOD, the brokerage must receive the appropriate documents to verify the assets can be transferred.

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TOD Benefits

Transfer on death accounts are easy to establish. Each company handles the process a little differently, but, in general, TOD accounts are easy to establish. You can start by contacting your investment company to ask how to open a new TOD account or to inquire about changing your existing accounts to TOD accounts.

No Need for Probate

Depending on state law and individual circumstances, probate can be a lengthy process. A TOD account gives the option to bypass probate and transfer the account directly to the TOD beneficiaries even if the account owner had a last will and testament or revocable living trust that stated otherwise. For this reason, you must carefully coordinate your will or trust with the beneficiaries you have named for your TOD accounts.

Joint TOD Accounts 

Multiple owners can maintain a joint account with rights of survivorship and have an undivided interest in the TOD account. When you die, your share of the investments is divided between the surviving owners equally. Tenancy in common and tenancy by the entirety are also possible, depending on your goals for the account.

TOD Accounts and Spouses

If you have a surviving spouse, investment and bank accounts will pass to them before going to a TOD account beneficiary. Depending on state law, a beneficiary may receive the assets of a TOD account only after a spouse’s death, if at all. Massachusetts and Colorado are among states with strong spousal inheritance laws, so you may want to look into local law yourself or have an advisor do it for you while composing your estate plan.

Bottom Line

When your family is grieving, complex estate planning can further complicate their lives. If you have someone in your family who you feel can responsibly manage the investments and property you leave behind, a transfer on death (TOD) account may be an ideal way of transferring portions of your estate while avoiding probate.

Why Do People Want to Avoid Probate?

Because probate entails filing legal documents, court hearings, and attorney representation, probate in Florida is lengthy and expensive. Families typically have to wait six months or more to complete the probate legal process and receive their inheritance. Florida statutes protect attorneys’ interest by establishing attorney fees based upon a percentage of probate estate value.

TOD/POD disadvantages: 

  • If you update your estate plan and forget to update your POD/TOD beneficiaries, you may risk not achieving your wishes for your heirs. 
  • For any administrative costs or estate taxes due, assets that pass by TOD are not included in a pro rata portion of those expenses. For example, if one child receives your investment accounts by TOD and another child receives your residence by will, the latter may not have sufficient liquidity to pay for their pro rata share since the TOD accounts are not included in the calculation. 
  • During your lifetime and after death, TOD assets are legally subject to your creditors’ claims. Although these accounts pass directly to the beneficiary and do not go through probate, if the executor does not have enough probate assets to pay the debts of the estate, creditors are entitled to claim some non-probate assets, including TOD accounts. While this may be difficult for creditors to do, if they have sufficient motivation, it is an option they may pursue. In addition, when the beneficiary receives the assets, the assets then have no protection from a lawsuit, creditors, divorce, or other claims like they would if the assets were held in a trust. 

Transferring control

Following the decedent’s death, taking control of the account can be a fairly simple process — all that might be required is to provide the death certificate and a picture identification to the account custodian. Because TOD accounts are still part of the decedent’s estate (although not the probate estate that the Last Will establishes), they may be subject to income, estate and/or inheritance tax. TOD accounts are also not out of reach for the decedent’s creditors or other relatives.

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Transfer on Death: New Accounts

In most cases, a new account is set up for the beneficiary, and the deceased person's securities are transferred into it. Typically, no buying, selling, transferring of the account to another firm, or other activities may occur until the account is open and legal authority has been established.

Opening a new account involves filling out an application and having the beneficiary provide the required personal information. Brokers use the information to learn about the account owner (beneficiary), meet his or her financial needs, and follow legal and regulatory obligations.

Which States Allow Transfer on Death Deeds?

The first state to recognize a TOD Deed was Missouri in 1989. Since that time, other states have followed suit, recognizing them as well. Note that you don’t actually have to live in the state to title property with a TOD Deed – the property just needs to be in one of the following states: 

  • **Alaska

  • Arizona

  • Arkansas

  • California

  • Colorado

  • **District of Columbia

  • **Hawaii

  • **Illinois

  • Indiana

  • Kansas

  • **Maine

  • Minnesota

  • Missouri

  • Montana

  • **Nebraska

  • **Nevada

  • **New Mexico

  • **North Dakota

  • Ohio

  • Oklahoma

  • **Oregon

  • **South Dakota

  • **Texas

  • **Utah

  • **Virginia

  • **Washington

  • **West Virginia

  • Wisconsin

  • Wyoming

**States that adopted the Uniform Real Property Transfer on Death Act (URPTODA).

URPTODA was introduced by the Uniform Law Commission and was designed to be a model for states to use when and if they decided to create their own TOD Deed laws.

What Are the Pitfalls (Cons) of a Transfer On Death / Pay On Death Account?

Lack of Resources To Pay Final Expenses

Death sadly includes expenses such as paying your final bills, paying for either burial or cremation, paying your final tax payments, etc. A significant downfall with relying upon TOD or POD account registration to administer your assets upon death is that there might not be remaining assets in your estate to cover such expenses.

If there are other assets outside of your TOD or POD accounts that will remain as part of your estate or Trust, perhaps sufficient assets will be available to administer your final affairs. However, if all of your assets pass by virtue of beneficiary designation, there could be a shortfall to cover your final financial affairs.

Possible Unintended Expenses Incurred by Your Executor, Trustee or Court Appointed Representative

If the person administering your affairs is the sole recipient of your assets, then perhaps there’s not a problem if he or she will assume responsibility to cover final expenses from the assets he or she receives from you.

However, if you name more than one recipient you need to consider:

o Who will bear the responsibility for your final expenses?

o Will he or she receive additional resources to help cover such expenses as compared to other named beneficiaries who won’t bear such expenses?

o Will the named beneficiaries of your account(s) work together to help pay bills, even though they may not share the same legal and financial responsibilities?

If you have any hesitation about the above, an important question to ask yourself is if the person who will be responsible for your final affairs might incur unintended expenses as a result of administering your estate and final affairs.

For example, assume you have two children, and that you name each child as fifty percent beneficiaries on all of your accounts and life insurance. Assume you also name only one child as the executor of your Will and your estate. The child named as the executor legally assumes your final financial obligations, which can be significant just for cremation or burial, let alone any other expenses.

You Cannot Name an Alternate or Contingent Beneficiary

If the person you nominated to receive the proceeds dies before you, then the contents of your account are automatically transferred to your estate.

Some States Only Permit an Equal Distribution of Funds in a POD Account

As a general rule, a payable on death account can have more than one beneficiary. However, if the account holder wants each beneficiary to receive unequal portions of the assets in the account, they must check that their state laws allow it.

Working in coordination

If you’re a TOD account owner, you should take care to update your account beneficiaries and ensure that your coordinated Last Will and TOD agreements fulfill your intentions. By being inattentive, a person might accidentally add additional beneficiaries to their Last Will but not update their TOD account. By doing so, the decedent would accidentally disinherit those beneficiaries from full shares in the estate, opening up the possibility of them making a claim against the TOD account in probate court.

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What is the difference between a POD and a TOD account?

A payable on death (POD) account is most often used with bank accounts such as checking or savings accounts. It can also be used with certificates of deposit (CDs). A TOD account is more often used for investment and brokerage accounts.

Creating a Transfer on Death Deed

As with any real estate deed, the document must comply with state law. All real estate deeds must include certain information, such as the names of the grantor (current owner) and grantee (beneficiary), legal description of the property, signature of the grantor, and legally required witness and notary provisions. Other requirements may include minimum type size and formatting to allow space for recording stamps.

Special language must be used to create a TOD deed, clearly stating the name of the beneficiary, who is usually referred to as the “grantee beneficiary,” and that transfer will take place upon the death of the current owner.

Prior to the death of the current owner, the TOD deed must be recorded in the property records of the county where the property is located. This is simply a matter of taking the original TOD deed to the county public records office — usually the county clerk or register of deeds — and paying a small fee. The records clerk will take the deed, stamp it to indicate the date it was received, take whatever other action is necessary to have it officially entered in the county records and return the original to you.

Preparing a TOD deed is not complicated but must be done in compliance with state law. Some states have an approved form, and using it may be the safest way to be sure your compliance.

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