Pros and Cons of Using Transfer on Death Accounts to Avoid Probate

Is a TOD Account Right for You?

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Transfer on death accounts, or simply TOD accounts, have become a popular way to avoid probate in the U.S.

What is a TOD Account?

A TOD account is a special type of investment account recognized under U.S. state law. When the TOD account owner dies, the investments remaining in the TOD account will pass to directly to the beneficiaries named by the owner outside of probate. TOD accounts can be set up for investment accounts, including mutual funds and stocks and bonds held in a brokerage account.

Some states also recognize TOD deeds.

In general, all that the beneficiaries of the TOD account will need to do to access the remaining investments after the owner dies is to provide the investment company with an original death certificate for the owner. The investments remaining in the TOD account will then be transferred to the beneficiaries named by the owner in the beneficiary designation form on file with the investment company in the percentages specified. Note that if a revocable living trust is named as the beneficiary of the TOD account, then after the account owner dies an employee identification number (EIN) will need to be obtained for the trust before the investments can be transferred to the trustee of the trust.

Is a TOD Account Right for You?

If you are thinking about establishing a TOD account, then consider the following pros and cons of this type of investment account:

  • TOD accounts are easy to establish. To establish a TOD account, simply contact your investment company and ask how to open a new TOD account or change your existing accounts into TOD accounts.
  • TOD accounts pass directly to the beneficiaries outside of probate. A TOD account will pass to the TOD beneficiaries even if the account owner had a last will and testament or revocable living trust and regardless of what the will or trust says. This means that if you name all four of your children as beneficiaries in your will or trust but only two of them in your TOD account beneficiary designation, then the investments remaining in your TOD account when you die will only be paid to the two children named in the beneficiary designation. Therefore, you need to carefully coordinate your will or trust with the beneficiaries you have named for your TOD accounts.
  • Joint TOD accounts can be established. Multiple owners can maintain a joint account that will pass to TOD beneficiaries after all of the owners die. However, for married couples, after one spouse dies, the surviving spouse will have full control of the TOD account and, therefore, can change the beneficiaries of the account. Therefore, if you and your spouse are in a second marriage and have children from other marriages, then this means that the surviving spouse can disinherit the children of the first spouse to die.
  • TOD beneficiaries need to be updated as your life changes. As your life changes, so should your TOD beneficiaries. This is particularly important if a beneficiary you have named predeceases you or falls out of favor. Note that if you have a revocable living trust and name it as the beneficiary of your TOD accounts, then each time you change the beneficiaries of the trust you will also change the TOD beneficiaries without having to change the TOD beneficiary designation you have on file with your bank.
  • Warning: Do not name minors as beneficiaries of TOD accounts. Naming minor grandchildren as TOD beneficiaries of your bank accounts may result in unintended consequences if the grandchildren are still minors when you die. This is because minor beneficiaries do not have any legal authority to receive investments in a TOD account. Instead, a court-supervised guardianship will need to be established for the minor until he or she reaches 18, at which time the minor will have full access to the TOD investments without any strings attached.