Hopefully, everyone reading this knows to add a beneficiary to their retirement accounts. I’m guessing a few of you know that you can add a Transfer on Death beneficiary to your other investment accounts. Adding a Transfer on Death beneficiary can be an excellent estate planning first step for those who don’t need or are not quite ready to set up a living trust or other more complex estate planning strategy.
What Is Transfer On Death Account?
In the simplest terms, using a Transfer on Death (TOD) designation is like adding a beneficiary to an account that does not typically have a beneficiary listed. Most retirement accounts offer a beneficiary option, whereas you would use a TOD for a brokerage or other non-retirement investment account.
When you use a TOD designation, you specify who will receive your assets when you die. This designation will help you avoid these assets going through the expensive, stressful, and time-consuming probate process.
While you are living, the name beneficiaries will have authority over or access to information about your investment accounts’ holdings or balances.
Did you know that you use a TOD designation to essentially add a beneficiary to your investment … [+]
Adding Transfer On Death To Your Accounts
You can add the TOD designation to both new and existing accounts. Typically, this won’t require any buying or selling of securities. Adding the TOD designation is important since you want to avoid triggering taxable events. Ask your fiduciary financial advisor or brokerage firm for whatever paperwork they require to add a TOD beneficiary to your investment accounts.
Real-Life Example Of A Transfer On Death Account
Estate and financial planning can be complicated, especially when many generations are involved. The most complex Transfer-on-Death example I saw was with a grandmother who wanted to help each of her 20 grandchildren beyond the inheritance from her trust, real estate, and retirement accounts.
Being a grandmother, she wanted to help her grandchildren while she was alive. She envisioned helping them with college, buying a new car, or even a semester abroad. With 20 grandchildren, the needs and spending would vary widely. She set up 20 separate TOD accounts, with each grandchild as a beneficiary.
She used the TOD accounts to fund the various extra help she provided to her grandchildren. Some received money for a home downpayment or help with wedding expenses.
When grandma eventually passes, each grandchild will receive the remaining balance of the TOD account, which they are the designated beneficiary of. Grandchildren who need more help will likely receive less money after her passing. In contrast, those who received fewer benefits will likely receive a larger amount from their TOD account.
In case you were wondering, most of Grandma’s other assets will be split via trust or beneficiary (from retirement accounts) to her adult children. Assuming they are alive when she passes, each child’s portion will eventually pass to their living children.
Are TOD And POD Different?
A Payable on Death (POD) designation is often used for bank accounts. The Transfer on Death (TOD) designation is most commonly used for non-retirement investment accounts.
Are TOD Accounts Taxable To Beneficiaries?
The TOD designation avoids the cost of probate; it does not eliminate estate taxes or other investment taxes that may be due on the account.
What Are The Disadvantages Of A TOD?
Keep in mind that a TOD account is still part of the decedent’s estate. So, if you are looking to avoid estate taxes (for large estates), you will likely look beyond a TOD strategy to pass on your assets.
Also, creditors can seek to have debts repaid before beneficiaries receive their proceeds from a TOD account.
A TOD can be a great way to help get your assets where you want them to go before you are ready for a whole estate plan. A TOD is best for smaller accounts and younger investors. Way back when, I used this quite a bit for my gay clients before marriage equality became recognized at the federal level.