Rosalind Evans
Understanding TOD Accounts: A Modern Estate Planning Tool
An increasingly popular way to avoid probate and other estate planning issues is the transfer on death or payable on death account. These accounts, often called TODs, offer a simple solution for transferring assets upon death without a will or probate court intervention. However, TOD accounts have advantages and disadvantages that are important to consider.
Setting Up a TOD Account
Most financial institutions now have a specific form that must be completed to designate an account as a TOD and name the beneficiary (or beneficiaries). Additionally, most states have laws recognizing and setting rules for these accounts. The original TOD account was created informally by its title and became known as a Totten trust following a landmark 1904 court case.
Benefits of TOD Accounts
One of the main benefits of a TOD account is that it avoids probate and isn’t covered by the will. According to estate planning expert John Smith, “Those qualities make TODs attractive for relatively modest balances and estates.” TODs are also ideal for asset transfers that the owner wants to keep private and can ensure the beneficiary has cash available for daily needs immediately after the owner’s passing before the bulk of the estate is settled.
Potential Downsides of TOD Accounts
While TOD accounts offer many advantages, they also come with potential downsides. For instance, multiple TOD accounts can be created, but if the estate executor or beneficiaries are unaware of all these accounts, they might become lost property. To avoid this, Smith advises, “An owner should keep a record of all TOD accounts and ensure the estate executor or a trusted person has this list.”
Estate Plan Consistency and Beneficiary Awareness
Another critical aspect to consider is the consistency of the estate plan. The owner must remember the TODs when creating or updating the rest of the estate plan to avoid inconsistencies, such as a beneficiary receiving more or less wealth than intended. Additionally, many TODs don’t allow the owner to name a contingent beneficiary. If the primary beneficiary dies first and the owner doesn’t update the account, the account will go through probate.
Asset Protection and Estate Cash Flow
A significant limitation of TODs is that they do not provide beneficiary creditor protection, unlike formal trusts. Most financial institutions only allow individuals, not formal trusts, to be beneficiaries of TODs. Therefore, creating a formal trust might be a better option for asset protection.
Moreover, placing too much of a person’s liquid assets into TODs can create cash flow problems for the estate. As Smith points out, “The beneficiary of a TOD isn’t obligated to help the estate and might not be inclined to. Some TOD beneficiaries will help with cash flow problems but expect to be reimbursed later from the estate.”
Making TOD Accounts Work for You
While TOD accounts offer a straightforward way to avoid probate and ensure immediate access to funds for beneficiaries, they must be managed carefully. Consider all the advantages and disadvantages of TODs and be sure the accounts are part of a comprehensive, consistent estate plan. Properly documenting and communicating the purpose and expectations of these accounts can help mitigate potential issues and ensure a smoother estate settlement process.
By understanding the intricacies of TOD accounts and integrating them thoughtfully into your estate plan, you can maximize their benefits while minimizing potential drawbacks. For more information on estate planning and other financial strategies, visit Mrkt360’s blog for the latest insights and tips.
