Transfer on death (TOD) or payable on death accounts have become increasingly popular in estate planning as a way to avoid probate and ensure a smooth transfer of assets to beneficiaries. Most financial institutions now offer specific forms to designate an account as a TOD and name the beneficiary. These accounts are governed by state laws that set rules and regulations for their use.
The concept of TOD accounts dates back to Totten trusts, which were informally created by the way the account was titled. This type of account allows assets to bypass probate and are not covered by the will, making them ideal for relatively modest balances and estates. TODs can also be used for asset transfers that the owner prefers to keep private, adding to their appeal.
In addition to avoiding probate, TODs can provide beneficiaries with immediate access to cash for daily needs after the owner passes away, before the estate is settled. However, if an owner has multiple TODs, there is a risk that the beneficiaries and executor may be unaware of all the accounts, potentially leading to lost property. It is important for the owner to maintain a record of all TOD accounts, share the information with a trusted individual, and ensure that beneficiaries are notified.
Owners should periodically review and update their TOD beneficiaries, as circumstances and relationships can change over time. Many TODs do not allow for contingent beneficiaries, meaning that if the primary beneficiary predeceases the owner, the account may go through probate. Additionally, TODs do not offer the same creditor protection as formal trusts, and financial institutions typically only allow individuals as beneficiaries.
While TODs can be a convenient way to provide immediate access to cash for family members, putting too many liquid assets into these accounts can create challenges for the executor in meeting other estate expenses and obligations. Beneficiaries are not obligated to assist the estate financially, so it is important for owners to communicate expectations and purpose of the TOD with their beneficiaries. Owners should carefully weigh the advantages and disadvantages of TODs and ensure that they are part of a comprehensive and consistent estate plan.
