...and when might it make sense for you?
A “transfer-on-death” or “TOD” designation provides for a simple and direct way to transfer assets to named beneficiaries without going through the probate process. The TOD designation is basically an agreement between you and your financial institution wherein you designate who will become the owner(s) of the assets in your account(s) upon your death. There are many attractive features to a TOD account designation, but, there are instances when a TOD account has the potential to convolute rather than simplify the settling of an estate. Set forth below is a brief discussion of the pros and cons of a TOD account.
For the purposes of this article, we assume you have a taxable investment account here at Burke Lawton Brewer & Burke. We will also assume that you would like the assets in this investment account to pass to your named beneficiary (or beneficiaries) upon your death without the requirement that you first submit these assets to the probate process. In order to accomplish this goal, you add the TOD designation to your investment account.
During your lifetime, you retain full ownership and control of all the assets in your investment account with a TOD designation. This means you may treat your TOD account in any way you wish – you can add money to the account, withdraw money from the account, choose the investments for the account, buy and sell securities in the account, and even empty and close the account. You also have the right to change the named beneficiaries or even revoke the TOD designation at any time (provided you are not legally incapacitated). Your beneficiary will not have any ownership right to your TOD account during your lifetime. Once you have passed away, however, your named beneficiary becomes the owner of the assets in your TOD account. The assets will transfer directly to your beneficiary and will not pass through probate first.
There are a number of scenarios where the TOD designation might be a good fit for a portion of your assets. For example, a TOD account might make sense if you want to:
- Make a simple outright distribution of assets to one beneficiary upon your death
- Transfer your account to several beneficiaries who are cooperative and get along well
- Distribute a particular asset outside your estate or in a way that is different from the rest of your estate plan
- Have the ability to easily change your beneficiary designations and to retain ownership control of your assets until your death
While there are a number of “pros” to using the TOD designation, there are also a number of scenarios where it may not make sense to go this route. For example, you may not want to use the TOD designation if you:
- Need a flexible distribution plan that can address a number of contingencies
- Want or need to create trusts for your beneficiaries or if you want or need to control their access to the assets
- Need an overall estate plan
- Need to have liquidity in your estate to pay final expenses and otherwise conclude your financial affairs
- Plan to name multiple beneficiaries who might have different ideas about how to divide your account’s assets
- Plan to name multiple beneficiaries for assets that are not easily divisible
With regard to the issue of listing multiple beneficiaries on a TOD account, it is also important to consider the potential headaches that can arise following your death. Upon your death, the multiple beneficiaries of your TOD account automatically become tenants-in-common owners of the assets in the account. This means that they all own the assets together and must reach agreement as to what to do with these assets. This may not be a problem if all the beneficiaries work well together and are cooperative. But, if the beneficiaries are not able to work together, this can be problematic.
Another area of potential concern regarding TOD accounts involves the maintenance of the beneficiary designations. Oftentimes, TOD beneficiaries are named ten or more years before the account owner dies. Sometimes the TOD designation is established and then never revisited even though the account owner’s circumstances have changed or the beneficiary’s circumstances have changed. For example, it is not uncommon for a beneficiary to die and the account owner fails to update the TOD beneficiary designation to name a new beneficiary. Similarly, it is not unheard of for a TOD designation to be placed on an account and then years later the account is mistakenly included in the provisions of a trust or other estate planning document. Upon the account owner’s death, the assets in the TOD account must transfer pursuant to the beneficiary designation rather than the provisions of the will or trust document.
Before you decide whether the TOD designation is right for you, you should consult with your estate planning attorney and your tax professional to ascertain whether this designation works in the context of your overall estate plan. If you ultimately decide that a TOD account makes good sense for you, your investment advisor here at Burke Lawton Brewer & Burke can help you update the necessary paperwork.