In the estate planning world, no method is perfect. Even with something like a transfer on death (TOD) account, there are both pros and cons.
If this is something you’re considering, here are a few things to keep in mind:
What is a Transfer on Death Account?
A transfer on death account is a type of beneficiary designation. Yes, similar to what you do when signing up with a new life insurance policy.
The idea behind a TOD is that it lets you name beneficiaries that can receive your assets at the time of your death. The assets do not need to go through probate, so it’s both fast and more reliable because you never know what may happen during the probate period.
A TOD is similar to a payable on death (POD) account. The difference is that TOD deals with investment assets such as stocks or mutual funds. A POD is only tied to bank assets.
Pros of a Transfer on Death Account
The first pro to keep in mind is that setting up a TOD is free. Most institutions will allow investors to name beneficiaries without any kind of charge. Considering the current economy, anything free is good news, right?
A TOD also tends to work quickly. When someone passes away and the beneficiary wants to receive the assets, the process doesn’t take very long. The main things needed are
The death certificate of the account holder, and
The beneficiary’s account information
The third advantage to a transfer on death account is that it’s easy to set up. You just have to fill out a little paperwork or an online form. It usually only takes a few minutes, and then you can sleep well at night, knowing your TOD is all set up.
Cons of a Transfer on Death Account
There are two main disadvantages to a TOD account.
First, if you set it up and your beneficiary passes away before you do, you’ll need to adjust your TOD accordingly. If you pass away before updating it, your assets will stay within your estate and go through the probate period.
Changing your TOD probably isn’t the first thing you think about upon hearing that your beneficiary – most likely someone you loved very much – has passed away. But, obviously, it doesn’t have to be the first thing you do. Just keep in mind that you should update it before too long.
The second disadvantage to a TOD or POD is that if all of your assets are given away upon your death, there may not be enough assets in your name left to cover final expenses.
Yes, there are expenses when you pass away.
Leftover bills, such as utility bills or a mortgage
Your burial or cremation
All of these things can add up. If you have assets in your name, those assets can be used to pay for these things. But suppose all of your assets were given to a beneficiary as part of a POD or TOD. In that case, your executor will be left scratching their head trying to figure out how to pay for these things.
What We Recommend
While a transfer on death account is useful, we recommend that our clients go a different path. Using something like a trust gives you the best of both worlds. It lets your beneficiaries skip probate while at the same time making sure your final wishes are carried out. As a result, your bills will be paid, your assets will be distributed how you want, and things won’t be tied up and contested in court for months and months.
Give us a call at 714-663-8000, or send us an email, and we’ll help you get started.