Transfer on death (TOD) accounts can keep your estate planning intact while keeping your beneficiaries out of court. If you’re among the57% of adults, according to Caring.com, who don’t currently have awillortrust, your family will likely head to probate court. Even estates with wills likely need to go throughprobate, which can burden your loved ones and create hostility between family members.A TOD account can avoid a legal mess by moving your assets without leaving them to a will or the courts. A financial advisor can help you set up an estate plan.
What Is a Transfer on Death (TOD) Account?
A transfer on death (TOD) account automatically transfers its assets to a named beneficiary when the holder dies For example, if you have a savings account with $100,000 in it and name your son as its beneficiary, that account would transfer to him upon your death.
As Fidelity Investments notes, a TOD is “a provision of a brokerage account that allows the account’s assets to pass directly to an intended beneficiary; the equivalent of a beneficiary designation.” Though laws governing estate planning vary by state, many bank accounts, investment accounts and even deeds are TOD accounts. If you own part of a TOD property, only your ownership share will transfer.
TOD Account Beneficiaries
TOD account holders can name multiple beneficiaries and divide assets any way they like. If your TOD investment account is set up to be split evenly between your children, each will receive an even part when you die.
However, the beneficiaries have no access or rights to a TOD account while its owner is alive. You can also change those beneficiaries at any time, so long as the TOD account holder is mentally competent. Similar to when you leave assets in a will, transfer on death doesn’t establish any rights until after you die. While you live, the named beneficiaries can’t access or control the accounts.
TOD Accounts vs. Wills
The most important benefit of a TOD account is simplicity.
Estate planning can help minimize the legal mess left after you die. Without it, the probate system can take over the distribution of your assets. It can also name an executor of your estate and pay off your remaining debts with your assets. It then distributes whatever is left according to your will, but only if you have one. If you don’t, your assets are distributed evenly by the probate court to whatever living relatives the executor can find.
Meanwhile, when a person with a TOD account dies, the executor sends a copy of the death certificate to an agent at the account’s bank or brokerage. That account is then re-registered in the beneficiary’s name.
TOD Accounts Supersede a Will
A TOD account skips the probate process and takes precedence over a will. If you will all of your money and property to your children but have a TOD account naming your brother the beneficiary, he will receive what’s in the account and your children will get everything else.
If you have a property in your will and have a TOD deed on that property, the TOD order may take precedence. The law varies by state, but banks and brokerages in many states will honor a TOD as soon as you die. If you have any doubts about a TOD contradicting your will, you may want to double-check the terms or consult an advisor.
TOD Accounts and Debt
A TOD account will prevent you from compiling additional debt through probate related to executor and attorney’s fees. However, it can’t erase your estate’s debt. Creditors can still go after assets in a TOD account.TOD accounts are also subject to inheritance tax and capital gains tax, as well as taxes on withdrawals from pre-tax investments including IRAs and 401(k) plans.
TOD Accounts and Spouses
If you have a surviving spouse, investment and bank accounts pass to them before a beneficiary. Depending on state law, a beneficiary may receive the assets of a TOD account only after a spouse’s death, if at all. Massachusetts and Colorado are among the states with strong spousal inheritance laws, so you may want to look into local law yourself or have an advisor do it for you while composing your estate plan.
Downsides of TOD Accounts
While a TOD account can be divided among several beneficiaries, that doesn’t mean it has to be divided equally. You may want to consult with beneficiaries and advisors to avoid any potential conflicts. Also, a TOD account with someone under 18 as a beneficiary could be an issue. That’s because minors can’t control investment accounts. If you haven’t designated a guardian or set up a trust, that may be a conversation worth considering.
Bottom Line
Estate planning can be difficult and something that people don’t like to think about. When your family is grieving, a lack of estate planning can further complicate their lives. If you have someone in your family who you feel can responsibly manage the investments and property you leave behind, a transfer on death (TOD) account may be an ideal way of transferring portions of your estate while avoiding probate.
A financial advisor can help you properly plan out your estate.Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
If you still have questions about wills and TODs, you may want to consider the strengths and limitations of wills. There are multiple types of wills, and you may find that one addresses your needs better than a TOD. For reference, here are somethings to know about making a will.
“A transfer on death account is similar to a beneficiary designation on an insurance policy or a retirement account," said Gaye Chun, a senior wealth planner for City National Bank
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If all of your money has already been claimed by your pay-on-death beneficiary, there will be no money left to pay these debts, and some of your assets will have to be liquidated to do so. This could mean losing valuable property you had hoped to leave to a child or grandchild.
A transfer on death (TOD) account automatically transfers its assets to a named beneficiary when the holder dies For example, if you have a savings account with $100,000 in it and name your son as its beneficiary, that account would transfer to him upon your death.
A TOD deed can be used to transfer real estate property to others after you pass away. Because a TOD deed bypasses probate, it can simplify the inheritance process and reduce costs for your loved ones.
Despite the convenience of avoiding probate, a TOD account does not inherently provide tax benefits or protections against estate or inheritance taxes. Upon your death, estate taxes may apply if the total value of your estate exceeds the federal exemption threshold, which is $13.61 million in 2024.
Designated beneficiaries receive the funds without having to wait for probate to conclude, which can take months. A POD or TOD account allows loved ones to get money almost immediately. Typically, all they need to provide is the death certificate and identification to the account-holding institution.
One consideration to keep in mind with TOD accounts is that the assets are still considered part of the estate of the deceased. That means that creditors can seek to have debts repaid before beneficiaries have access to the assets.
During your lifetime, you retain full ownership and control of assets in a TOD account. You can manage the investments as you see fit, make additions or withdrawals, and move or close the account if you wish.
A few of pros of the TOD Deed is it avoids probate and that delay. It automatically transfers on death and is less expensive and simpler than estate planning instruments such as a revocable living trust. As to cons, it is in the public eye. Once recorded it can be viewed by anyone.
The TOD deed does not give your beneficiary any control over or claim to your property while you're still living. When you die, ownership of the property will pass automatically and immediately to your beneficiary, along with any mortgage balance, liens or judgments on the property.
There is a federal estate tax, however, which is paid by the estate of the deceased. In 2024, the first $13,610,000 of an estate is exempt from the estate tax. A beneficiary may also have to pay capital gains taxes if they sell assets they've inherited, including stocks, real estate or valuables.
In the simplest terms, using a Transfer on Death (TOD) designation is like adding a beneficiary to an account that does not typically have a beneficiary listed. Most retirement accounts offer a beneficiary option, whereas you would use a TOD for a brokerage or other non-retirement investment account.
Strategies to transfer wealth without a heavy tax burden include creating an irrevocable trust, engaging in annual gifting, forming a family limited partnership, or forming a generation-skipping transfer trust.
If you anticipate or worry about becoming incapacitated, you might want to opt for a living trust. Unlike a TOD deed, a living trust can name a successor trustee to take care of the trust property if you become incapacitated.
Property with a TOD deed typically does not have to pass through the probate process to transfer to its beneficiaries. In some states, probate is a long, expensive process and can subject your assets to additional taxes. Avoid federal gift tax paperwork.
A TOD also allows the account owner complete control of the funds while they are alive, and the designation can be changed by simply completing a new designation form with the institution.
Although a transfer on death deed appears to have simplicity, there are many shortcomings. The first of which is that, if the named beneficiary dies before the property owner does, the deed becomes invalid. The property could then fall into probate upon the owner's death.
Introduction: My name is Geoffrey Lueilwitz, I am a zealous, encouraging, sparkling, enchanting, graceful, faithful, nice person who loves writing and wants to share my knowledge and understanding with you.
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