What Are Transfer on Death (TOD) Accounts For Estate Planning? (2024)

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.

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