Transfer on Death (Tod) Accounts Explained

An investment or brokerage account may be one of the most valuable assets a person owns. Ordinarily, stocks, bonds, and similar investments would be part of their probate estate upon their death. Understandably, that is an outcome many people wish to avoid. Fortunately, there are more straightforward ways to transfer investments to your intended beneficiaries. One of these is a “transfer on death” or TOD account, which can serve as a part of your estate plan.

What is a TOD Account?

A TOD account is an account for which a designation has been made indicating that upon the death of the account holder, account assets are to be transferred to a named beneficiary or beneficiaries.

Is a Transfer on Death Account the Same Thing as a Payable on Death Account?

Many people use the terms “transfer on death” and “payable on death” interchangeably, but there is some difference. The term “payable on death” is more properly used for bank accounts, and “transfer on death” is more appropriately used for securities such as stocks and bonds.

Does a Beneficiary Have any Access to the Asset During My Lifetime?

No. The account and assets remain firmly in your control as the account owner during your lifetime. You can change or revoke your beneficiary designation at any time up to your death as long as you have the legal capacity to do so. Your beneficiary has no ownership of the accounts, cannot withdraw assets, or take any other action regarding the account until after your death.

What States Allow a TOD Account?

Almost all U.S. states permit an owner of stocks or bonds or a brokerage account to make a TOD designation. The only two that do not, as of this writing, are Texas and Louisiana.

Can I Make a Transfer on Death Designation for Real Estate?

Currently, a little over half of U.S. states permit transfer on death deeds for real estate. Michigan is not technically among them, but you can use a ladybird deed to achieve a similar result. A ladybird deed can also be used to leave real estate to multiple beneficiaries. However, those people would then need to agree to take any action on the property, such as selling it. Difficulty reaching consensus can lead to family disputes and deep rifts. A ladybird deed can be a great option in some situations, but much less desirable in others.

What are the Pros and Cons of Transfer on Death Accounts?

One of the biggest advantages of TOD accounts is probate avoidance. Making a TOD designation is also straightforward and involves little, if any, expense. The transfer does not require any court involvement or the need to hire an attorney. It is also possible to name multiple beneficiaries of an asset or account, and to assign different percentages of the asset to each.

There are also downsides to using a TOD account, including the potential for unintended consequences in the distribution of an estate. If your will dictates that your estate is to be divided equally among your three children, but you have a TOD account designating one child as beneficiary, that account will not be included in the assets distributed under your will. But if you intended that account to be part of “your estate,” your children could receive a very unequal inheritance that you did not intend.

Another unintended consequence is that a TOD account could cause a beneficiary with special needs to become ineligible for government benefits they rely on. Many benefits are means-tested, and a sudden inheritance through a transfer on your death could cause their assets to rise to a level that disqualifies them for assistance.

There also exists the possibility that a beneficiary could predecease you. If that happens, the asset may need to go through probate, despite your intentions. Even if the beneficiary survives you, if they die before they can claim the asset, it will need to go through the beneficiary’s probate estate. In a related scenario, the beneficiary might survive long enough to claim the asset, then die, leaving their surviving spouse the owner. Depending on your feelings about the spouse, that might be an undesirable result.

You might consider naming your child as a beneficiary on a TOD account. However, if you were to die while the child was a minor, a conservator would need to be appointed to manage their assets—to which they would then be fully entitled on their 18th birthday. Handing a newly-minted adult tens or hundreds of thousands of dollars can, of course, be a recipe for ruin. If you don’t want your child to have access to your investments until they are old enough to handle them responsibly, a trust is a much better option.

Even if your intended beneficiary is an adult, there are significant potential risks to naming them beneficiary of a TOD account. For instance, they could have creditors who might seize the assets as soon as your beneficiary becomes entitled to them. Your beneficiary could have an addiction or gambling problem and need to be protected from themselves. In some situations, the inherited assets might become vulnerable to a spouse’s claims in a divorce. In all these scenarios, a trust is likely a superior way to protect the assets.

Can a Transfer on Death Account Be Contested?

Your heirs may decide to mount a challenge to a TOD designation in probate court for various reasons, such as if they believe you lacked mental capacity when you made the designation. However, challenges to TOD accounts are difficult and are often unsuccessful. Simply arguing that the TOD designation brought about an unintended unequal distribution is not enough to prevail.

Are There Alternatives to a TOD Account?

If you are looking to avoid probate and/or want to leave stocks, bonds, brokerage accounts and other securities to multiple beneficiaries, a TOD account is not your only option—and it may not be the best one.

A trust can help you avoid probate for most or all of your assets, not just securities. With a revocable living trust, you can also retain control of the assets throughout your lifetime and designate a successor trustee to manage them after your death.

As mentioned above, a trust can help to avoid many of the unintended consequences that can arise with TOD accounts. For instance, if you have a family member has special needs, you could create a special needs trust to give them access to assets after your death without jeopardizing their government benefits.

To learn more about transfer on death accounts and whether they should be a part of your estate plan, contact Estate Planning & Elder Law Services to schedule a consultation.