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Estate Planning with Transfer on Death Accounts

Estate planning with a will (as opposed to a living trust) often carries with it the need to involve a court process called probate to transfer assets out of a deceased person’s name after they pass away. In states such as California, probate is a lengthy, public, and expensive process that most people are highly motivated to avoid.

That is why I love estate planning with transfer on death accounts as a probate avoidance tool. By changing some accounts to transfer on death (TOD), which is arranged through the financial institution itself, you can avoid some assets going through probate, says Yahoo! Finance in the article “Transfer on Death (TOD) Accounts for Estate Planning.”

These accounts are also commonly referred to as payable on death (POD) accounts. We’ll refer to them as TOD here for simplicity.

Here’s how using these accounts for estate planning works:

A TOD (or POD)  account automatically transfers the assets to a named beneficiary when the account holder dies. Let’s say you have a savings account with $100,000 in it. Your daughter is the beneficiary for the TOD account. When you die, the account transfers to her.

A more formal definition: a TOD is a provision of an account that allows the assets to pass directly to an intended beneficiary, the equivalent of a beneficiary designation. Note that the laws that govern estate planning vary from state to state, but most banks, investment accounts and even real estate deeds can become TOD property. If you own part of a TOD property, only your ownership share transfers.

TOD account holders can name multiple beneficiaries and split up assets any way they wish. You can open a TOD account to be split between two children, for instance, and they’ll each receive 50% of the holdings, when you pass.

One thing to bear in mind: the beneficiaries have no right or access to the TOD account while the owner is living. The beneficiaries can change at any time, as long as the TOD account owner is mentally competent. Just as assets in a will can’t be accessed by heirs until you die, beneficiaries on a TOD account have no rights or access to a TOD account until the original owner dies.

Simplicity is one reason why people like to use the TOD account for estate planning purposes. A TOD account usually only requires that a death certificate be sent to an agent at the account’s bank or brokerage house. The account is then re-registered in the beneficiary’s name.

To properly use these accounts for estate planning, it is important to be sure and integrate them properly so that your wishes are carried out. Here’s why: whatever your will says does not impact the TOD account. If your will instructs your executor to give all of your money to your sister, but the TOD account names your brother as a beneficiary, any money in the account is going to your brother. The TOD account assets essentially bypass the terms of a person’s will. So be sure that your TOD account beneficiaries, and the terms of your will, are in harmony with your desires.

Speak with an estate planning attorney about how a TOD account might be useful for your purposes for the specific assets you own, and in relation to any estate planning documents you currently have in place.

Reference: Yahoo! Finance (June 26, 2019) “Transfer on Death (TOD) Accounts for Estate Planning”


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