Transfer on Death (TOD) accounts are a tool that many financial advisors recommend to their clients. TOD accounts automatically transfer their assets to a named beneficiary when the account holder passes away. For instance, suppose you have a savings account with $50,000 in it and name your son as its beneficiary. In that case, all funds in the account would transfer to him upon your death. Laws covering estate planning vary by state. However, many checking and savings accounts, investment accounts, and even deeds are treated as TOD accounts.
While these accounts have their upsides, they aren’t the complete answer when it comes to estate planning. No matter what other professionals might tell you, it’s essential to have an estate plan even if you have TOD accounts.
The Downsides of TOD Accounts
While a TOD account can be divided among numerous beneficiaries, it doesn’t necessarily have to be divided equally. It’s a good idea to consult with your beneficiaries and estate planning attorney to circumvent any potential conflicts. Keep in mind that a TOD account with a beneficiary that has yet to reach 18 years of age could create a problem in probate court, as minors can’t control investment accounts. If you don’t have a designated guardian or set up a trust with an appointed trustee, it’s a good idea to pursue that.
When property passes under a will or trust, there is generally one person, known as an executor or trustee, in charge of the property and its distribution. When important decisions need to be made, the executor or trustee has the authority to determine the outcome.In most cases, distributions to beneficiaries are made after the executor or trustee has made arrangements to take care of bills, administration expenses, and taxes for the deceased estate. A TOD account lacks someone in charge.
While TOD accounts can undoubtedly simplify the estate planning and probate process in the event of your death, they aren’t the answer to everything. Many different types of assets can’t be governed with a TOD account, such as real estate property or heirlooms. If you ignore these assets and only rely on a TOD as an estate plan, your estate will wind up in probate court—potentially for some time and cost your family and heirs more money than it needs to. It can also lead to some heated family arguments.
What Happens if My Will/Living Trust and My TOD Designation Disagree?
The TOD account will be governed by the TOD designation, not the will or trust. Any assets in your probate estate are governed by your will or the law. Assets that are titled in the name of your living trust will be distributed according to the terms of your trust. Your TOD account has no authority to govern your will or living trust and vice versa. If you want to help ease the burden of your death for your loved ones, it’s best to set up a will or living trust with the help of an experienced estate planning attorney. Don’t simply rely on TOD accounts.
Meet with a Skilled Estate Planning Lawyer Today
A TOD designation is no substitute for a sound estate plan. It affects only the assets in that specific account. Most individuals will still need a will or living trust to govern the distribution of their other assets. You can learn more about TOD and estate planning by meeting with one of our skilled estate planning attorneys today.