When considering how to pass your assets on to the next generation or other beneficiaries, you have many options. One tool in your estate planning toolkit is the transfer-on-death account.
Transfer-on-death (TOD) accounts allow account owners to designate beneficiaries who will automatically inherit the account’s assets upon the owner’s death. These accounts can apply to various types of financial assets, such as bank accounts, brokerage accounts, and even some real estate.
By sidestepping the court process known as probate, TOD accounts offer an efficient way to pass assets to loved ones or charities. However, they are not suitable for all situations. Knowing when and how to use a transfer-on-death account can help your assets get to your beneficiaries in a timely manner.
When a Transfer-on-Death Account Can Be Beneficial
TOD accounts can be useful for numerous reasons. Here are some scenarios to consider.
Avoiding Probate: One of the primary advantages of TOD accounts is that they bypass the probate process, which can be time-consuming, expensive, and public. The assets in a TOD account transfer directly to the designated beneficiaries, often within weeks, reducing administrative delays. Because probate proceedings are public record, this keeps the transfer private.
Cost-Effective Estate Planning: Setting up a TOD account typically involves minimal cost, making it a more affordable option than creating a trust. This can be particularly advantageous for individuals with smaller estates.
Simplicity in Asset Transfer: TOD accounts are straightforward to set up and administer. The account owner simply names beneficiaries, who then receive the assets after the account owner dies – without having to go through additional paperwork or court intervention.
Flexibility During the Owner’s Lifetime: The account owner retains full control of the assets during their lifetime and can change or remove beneficiaries at any time without the beneficiaries’ consent.
When a Transfer-on-Death Account May Not Be Beneficial
Though TOD accounts can be useful in many situations, there are times when they may not provide the best solution. Consider the following scenarios and see if any apply to your situation.
Complex Family Dynamics: In families with complicated relationships, TOD accounts can lead to disputes. For example, if beneficiaries are not equally named or if some family members are left out entirely, conflicts may arise.
Inadequate Estate Planning for Large Estates: For individuals with substantial assets or complex estates, TOD accounts may not address all planning needs. They do not provide tax advantages or the level of control over asset distribution that a trust might.
Lack of Contingency Planning: Though TOD accounts allow for primary beneficiaries, they may not always offer robust options for contingent beneficiaries. If the named beneficiary predeceases the account owner and no alternates are listed, the assets could end up in probate.
Potential for Unintended Consequences: Life events, such as divorce or estrangement, can render a TOD designation outdated. If account owners forget to update beneficiaries, assets might go to unintended recipients.
Not Suitable for Minors: If the named beneficiary of a TOD account is a minor, they cannot legally manage the inherited assets until reaching adulthood. This situation often necessitates the appointment of a guardian, complicating the transfer process.
Creditors’ Claims: Beneficiaries of TOD accounts are not shielded from creditors. If the beneficiary has significant debts, creditors may claim the inherited assets to settle outstanding liabilities.
Beneficiaries With Disabilities: For individuals with disabilities who are receiving government benefits, being the beneficiary of a TOD account could cause them to lose their benefits. Other estate planning tools, such as a special needs trust, may be necessary in such a situation.
Considerations When Using TOD Accounts
Though TOD accounts are relatively simple and straightforward, there are some things you should keep in mind when employing them.
Review and Update Regularly: Periodically review your beneficiary designations, especially after major life events such as marriage, divorce, the birth of children, or the death of a beneficiary.
Coordination With Other Estate Planning Tools: Ensure TOD accounts align with your overall estate plan to avoid conflicts between documents like wills and trusts.
Getting More Help With Transfer-on-Death Accounts
TOD accounts are a helpful tool in putting together an estate plan. Consult with the experienced estate planning attorneys at Kurre Schneps to see if a Transfer-on-Death account is right for you and to ensure your TOD designations align with your overall estate plan.
