In estate planning, probate is a dreaded word. The legal process of distributing assets through court often drains resources that could otherwise benefit your loved ones. Thankfully, tools like Transfer on Death (TOD) designations can help protect your assets from probate, ensuring your estate is passed on efficiently.
This article breaks down what TOD is, how it works, and when it makes sense to use it in your estate planning.
What is Transfer on Death (TOD)?
Transfer on Death (TOD) is a designation that allows you to name one or more beneficiaries to receive the balance of a bank, investment, or retirement account after your death—without the need for probate. In some cases, TOD can also apply to real estate.
By setting up TOD on certain accounts, you can designate who will inherit them upon your passing. This can be your spouse, children, grandchildren, or any other beneficiaries you choose. You can even specify how much each beneficiary will receive, such as splitting an account 50/50 or 33/33/33 between three people.
Can I Make My Existing Accounts Transferable?
Yes, but it depends on the account and the institution. Converting an existing bank or investment account to TOD is often straightforward, though the process can vary by bank or brokerage. This is sometimes referred to as a Totten Trust, where the account holder names beneficiaries to inherit the funds upon their death.
If you’re unsure whether your account is eligible for TOD, check with your financial institution. In some cases, you may need to move funds to a new account that supports TOD designations.
When Should You Use Transfer of Death?
TOD is an excellent option for avoiding probate, but it’s not suitable for every situation. Here are a few things to keep in mind:
1. Certain Accounts Cannot Be Designated TOD
While TOD is commonly used for bank accounts, investment accounts, and retirement plans, it doesn’t apply to all types of assets. Some accounts, like certain types of bonds or real estate, may have different rules.
2. Right of Survivorship
For married couples, some accounts automatically pass to the surviving spouse, regardless of TOD designations. This arrangement is known as “right of survivorship” and applies to joint accounts.
3. Community Property States
If you live in a community property state, your spouse may need to be named as a beneficiary on an IRA, or they must agree not to be the beneficiary. Be sure to understand the rules specific to your state.
4. State-Specific Rules
Some states don’t recognize TOD designations or have specific rules regarding their use. It’s important to check your state’s laws or consult an estate attorney to ensure TOD is a viable option.
5. TOD Trumps Will Designations
If you name beneficiaries on a TOD account, those designations usually take precedence over instructions in your will. This means that if your will directs assets to a different person, but you’ve named someone in a TOD designation, the TOD instructions will prevail.
Is Transfer of Death Right for Your Estate Plan?
TOD can simplify the transfer of assets and avoid the lengthy probate process, but it’s essential to understand the limitations and exceptions that come with it. Whether you can use TOD depends on the type of account, the rules in your state, and your overall estate strategy.
If you’re unsure how TOD fits into your estate plan, consider consulting with an attorney or financial advisor. They can help you determine the best way to structure your estate and protect your assets from probate.
By taking proactive steps like using TOD designations, you can ensure that your assets pass to your loved ones quickly and efficiently, preserving your legacy without unnecessary legal hurdles. Let Peacefully help.
