Usually, when people think of estate planning, they imagine filling out a will or establishing a trust. However, some assets allow you to name beneficiaries directly through a process called transfer on death (TOD).
Transfer on death can be beneficial in various circumstances, particularly if you want to avoid probate. Today we’re going to discuss the ins and outs of TOD and when it is most beneficial.
As the name implies, TOD accounts transfer to a named beneficiary upon your death. Depending on the situation, there are a couple of different ways that this transfer can take place, including:
In this case, two or more people are attached to the account. So, when one dies, ownership is divided equally among the remaining members. Survivors can make changes to the account or leave it as-is.
Once the last survivor dies, the account transfers to the named beneficiary. One example of survivorship is a joint bank account with a spouse. Once you die, your significant other assumes ownership of the account and can use it however they wish. After your spouse dies, any funds left can transfer to a beneficiary, such as a child or relative.
Some accounts let you name multiple people as beneficiaries. In this case, you can dictate the percentage that each person receives. For example, if you have a retirement account and outlive your spouse, you can name all of your children as beneficiaries and split the funds evenly or however you wish.
Not all financial assets have the option for transfer on death. Some typical accounts that utilize this process include:
All retirement accounts transfer on death. In most states, spouses have legal rights to these accounts, meaning that the account owner can’t name different beneficiaries. If you are unmarried or outlive your spouse, you can put whoever you want as a recipient.
If you own stocks, bonds, and other investment accounts, you can transfer those on death as well. Since spouses do not have rights to these funds, you can name any number of beneficiaries, as well as the percentage of ownership they will receive.
When it comes to standard bank accounts, you can’t transfer ownership of the assets. Instead, your bank or credit union will pay beneficiaries from your account. Again, you can name as many recipients as you want and their percentage. However, if you have a joint account with someone else (i.e., a spouse), transfer on death applies instead.
Typically, to pass property to a beneficiary requires either a trust or a will. However, some states allow transfer on death ownership for real estate. Be sure to talk with your financial advisor and/or estate planner to see if that is an option.
As a rule, most financial accounts can use TOD protocols to avoid probate. However, physical assets like cars, jewelry, or other items have to be allocated through a will, meaning that they will need to pass through probate court. However, you can expedite this process by putting those assets in a trust.
When talking about estate planning, transfer on death provisions can simplify the process of passing money and assets to your loved ones.
When you die, any assets that don’t automatically transfer ownership to another person have to go through probate. Probate is the act of verifying the contents of your will and determining how your belongings will be allocated.
Depending on where you live, probate can be a long process, making it hard for your loved ones to receive any assets or payments. If you don’t have a will or trust set up, probate can go on even longer.
Transfer on death accounts allow you to skip probate altogether, making it easier for your beneficiaries to get access to any necessary funds.
While TOD policies are efficient, they can potentially cause problems in some situations. For example, if your spouse assumes ownership of your account, they could theoretically disinherit beneficiaries, or name new recipients.
Let’s say that you have a TOD account with your current spouse, who remarries after you die. Since your spouse has full ownership of the account, they could potentially remove your beneficiaries, such as children you had through a previous marriage.
Realistically, you will have a mix of TOD accounts, a will, and one or more trusts as part of your estate planning. While there are pros and cons to each option, you need to know how to manage them while you’re still alive.
Here are some best practices for using transfer on death protocols:
You should pay close attention to all of your estate planning tools, including life insurance, retirement accounts, wills, and trusts. For example, if you remarry, you need to update your TOD beneficiary as your new spouse. Otherwise, your old spouse could retain ownership once you die, creating a messy situation.
It’s always a good idea to discuss your estate planning with those involved. While it can be challenging to talk about your death and what comes after, it’s much better to have these conversations beforehand. Otherwise, your beneficiaries may be blindsided by your decisions, or the whole process could take much longer than you anticipate.
When it comes to transfer on death accounts, you want to notify your beneficiaries and provide them with any pertinent details or documentation. For example, transferring brokerage accounts requires a signed death certificate, along with other account paperwork. If your beneficiaries don’t have these items ready, they may not be able to access those funds.
While TOD accounts work best in some situations, they may not be ideal for others. Talk to your estate planner about different options like trusts. In some instances, a trust may make it easier to pass financial assets and avoid complicated situations later on.
Children cannot receive financial assets until they turn 18. So, suppose you name a minor (i.e., a grandchild) and die before they are legally an adult. In that case, the asset has to go into conservatorship or a trust until the beneficiary is old enough. Be sure that you have plans in place in case this happens so that the transfer goes smoothly.
Learn how your spouse and heirs could have been negatively impacted if your estate plan hasn't been updated to reflect the new laws. Find out what the new regulations did to open 6 estate planning "wormholes" in our downloadable PDF.
Estate planning can be complex and overwhelming at first, but it is necessary to ensure that your loved ones are taken care of when you’re gone. We can help you determine the best options for your assets, whether they are TOD accounts or otherwise. Contact us today to get started.
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