An increasingly popular approach to avoiding probate and other estate planning issues is the transfer on death or pay-on-death account. These accounts, which I discuss with as TODs, can involve greater than many individuals realize.
Most financial institutions now have a special form that have to be filled out to designate an account as a TOD and name the beneficiary (or beneficiaries). Most states have laws that recognize these accounts and establish rules for them.
The original TOD account was opened informally by account designation and have become often known as the “Totten Trust,” after the name of the 1904 court case wherein it was recognized.
A TOD avoids probate and isn’t covered by the need. These features make TODs attractive for relatively modest balances and estates. TODs will also be good for asset transfers that the owner wants to maintain private.
A TOD also can be sure that the beneficiary has money for each day needs after the owner’s death and before nearly all of the estate is settled.
Some people like the advantages of the accounts a lot that they’ve multiple TODs. The potential downside is that the beneficiaries and estate administrator may not know all the TODs. The accounts may very well be lost after the owner’s death if the beneficiaries don’t claim them.
To avoid this, an owner should keep a record of all TOD accounts. Make sure the estate administrator or one other trusted person has the list and informs beneficiaries of their interests.
The owner must also consider the TODs when creating or updating the remainder of the estate plan. Otherwise, the plan may contain inconsistencies, resembling a beneficiary receiving roughly assets than intended.
In addition, the owner must review beneficiary designations periodically. Beneficiaries may die, turn into estranged, or undergo other changes. Or the owner’s goals and objectives may change.
Many TODs don’t allow the owner to call a backup beneficiary. If the first beneficiary dies first and the owner dies before the account is updated, the account will go through probate. Owners should concentrate on this before deciding to make use of a TOD.
A TOD doesn’t provide creditor protection to beneficiaries like a proper trust does, and most financial institutions don’t allow TODs to call formal trusts as beneficiaries. Institutions only allow individuals as beneficiaries of TODs. To protect your assets, chances are you’ll wish to arrange a proper trust.
The account holder should clearly explain to the beneficiary the aim of the TOD and expectations regarding its use.
Sometimes most of an individual’s liquid assets are TODs. This ensures that members of the family have enough money to cover their expenses. Otherwise, the family could have to attend for the executor to be appointed, gain access to money, and distribute the estate.
However, if an excessive amount of of an individual’s liquid assets are invested in an executor’s estate, it might also mean that the executor doesn’t have enough money to pay probate expenses, distribute certain bequests, and meet other obligations.
The beneficiary of a TOD isn’t obligated to assist the estate and is probably not inclined to achieve this. Some TOD beneficiaries help the estate with liquidity problems but expect to be compensated by the estate later.
Weigh all the professionals and cons of TODs and ensure the accounts are a part of a comprehensive, consistent estate plan.
