What is a Transfer-on-Death Agreement?
Transfer-on-Death (TOD) accounts and deeds are a popular estate planning tool that can help you avoid probate for certain assets and properties. While many people choose to use TOD designations to avoid probate, they are not a substitute for having a proper estate plan. But why are they popular and what do they achieve? Are they a good fit for everyone? Let’s take a closer look.
What is a Transfer-on-Death Agreement?
A Transfer-on-Death agreement, account, deed or other designation is an account or property that names a beneficiary to whom the account or property is to be transferred when the owner dies. It is also known as a Totten trust or poor man’s will, but it is neither a will nor a trust. If there is a named beneficiary, then the property or asset passes directly to them without passing through probate (the legal process of sorting out and distributing property, assets, debts, etc. after you die).
While you are alive, you still have full rights to the TOD asset or property. You also retain the power to change the named beneficiary for the account or property. If more than one person is one the account or a co-owner of the property, then generally it will not pass to the beneficiary until all primary account holders or co-owners have passed away. However, if there is a joint account owner or jointly owner TOD property, you should know that if one owner passes away, the surviving owner can change the beneficiary to whomever they wish.
If the designated beneficiary predeceases the account owner, and a new beneficiary is not chosen, then the account will pass through probate.
How do I set up a TOD account?
Setting up a TOD account is simple. Just tell your banker you want to set up a transfer-on-death account or convert a current account to a TOD account. They will provide you with the necessary paperwork. When you have passed away, the beneficiary can claim the account by presenting a certified copy of the death certificate and by showing proof of their identity at the appropriate bank or financial institution.
You can change the beneficiary at any time or even close the account—it’s fully in your control while you are alive. You cannot name a minor as a beneficiary, so if you would like to pass assets to a minor using a TOD account or deed, you will likely need to instead name a custodian to manage it until the child is an adult. You may also be allowed to name a backup beneficiary, in case the named beneficiary predeceases you.
You can also name more than one beneficiary if your financial institution allows it, but that can get a little sticky in terms of dividing assets, having beneficiaries make joint decisions, and for reporting taxes. Some institutions require beneficiaries to split assets equally if there is more than one beneficiary.
Is TOD just for securities and real estate?
You can have a transfer-on-death provision on a number of accounts and kinds of property, though the specifics may vary among states. That includes retirement accounts, savings accounts, savings bonds, security deposits, mutual funds, stocks, and bonds, to name a few.
Are TOD agreements valid in all 50 states?
Not exactly. There are a couple of issues that could affect TOD accounts in different states. Most states have adopted laws that allow you setup TOD accounts for stocks, bonds, and brokerage accounts. But in community property states, you will need to have a signed release from your spouse if they are not a joint account owner or the beneficiary on the TOD account. Your spouse may be entitled to one-half of the value of the securities you own even if they are in your name. Community property states include Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin (and Alaska, if you sign a community property agreement).
Also, only certain states allow you to have a TOD deed for a property. States where it is allowed are: Alaska, Arizona, Arkansas, California, Colorado, District of Columbia, Hawaii, Illinois, Indiana, Kansas, Minnesota, Missouri, Montana, Nebraska, Nevada, New Mexico, North Dakota, Ohio, Oklahoma, Oregon, South Dakota, Texas, Virginia, Washington, West Virginia, Wisconsin, and Wyoming.
Some states allow for TOD vehicle registrations, giving the beneficiary a right to directly inherit a vehicle. States that allow a TOD vehicle registration include: Arizona, Arkansas, California, Connecticut, Delaware, Illinois, Indiana, Kansas, Missouri, Nebraska, Nevada, Ohio, Vermont, and Virginia.
What are the disadvantages of TOD designations?
Transfer-on-death designations can be useful in some cases, especially where the estate is very straightforward and possible issues with heirs are minimal. But there are a number of disadvantages or reasons to not use TOD accounts as part of your estate planning. Consider the following:
- If there is a surviving account or property holder, they can change the beneficiary after you have died, possibly disinheriting someone you intended as an heir.
- The TOD designations are not nearly as robust or helpful for special circumstances as a trust or will. If you have heirs who may have disabilities or for whom you may want to distribute assets over time or with restrictions, a trust is a better choice.
- You could forget that you have TOD designations on certain accounts or properties and create a contradictory will.
- If your estate has many debts or expenses and not a lot of liquid assets, having accounts pass directly to a beneficiary rather than being available to pay estate expenses may make settling the estate more complicated.
- You still need a durable power of attorney, in case you become incapacitated and need someone to have access to your finances—the TOD designation only passes an account to a beneficiary after the account holder dies.
What if the beneficiary listed in the will is different from the TOD account or deed?
The beneficiary designation on the TOD account or deed will generally take precedence if there is a conflict between the two. The possible exception to that would be if you live in one of the 9 community property states and the beneficiary is not the spouse. In community property states, the spouse is entitled to half the assets in the account (if acquired during marriage and if they have not waived their interest).