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What is a Transfer on Death, or TOD, Account?

Avoiding Probate With Transfer on Death Accounts

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A transfer on death account, or TOD account for short, is a special type of investment account that is recognized under state law. A TOD account allows for the assets remaining in the investment account when the account owner dies to pass to directly to the beneficiaries named by the account owner. This will happen outside of probate and all that the beneficiaries of the TOD account will have to do in order to gain control of the balance of the account after the owner dies is to show the holder of the investment account (usually a brokerage firm) an original death certificate for the owner. The assets remaining in the TOD account will then be paid to the beneficiaries named by the account owner in the beneficiary designation form on file with the brokerage firm. This will happen regardless of whether or not the TOD account owner had a last will and testament and, even if so, what the last will and testament says.

Who Has Access to a TOD Account?

While the owner of the TOD account is alive, the beneficiaries named by the owner to receive the assets left in the account after the owner dies will not have any access to or control over the TOD account, only the owner will have access to and control over the assets held in the account. In addition, the owner can change the beneficiaries of the TOD account at any time while the owner is still alive and competent to make changes to the account.

Can a TOD Account Be Owned by More Than One Person?

TOD accounts do not have to be established by only one person. Two, three or even more people can have access to a TOD account while any one of the owners is still alive, and then when the last owner dies the assets remaining in the TOD account will be paid to the beneficiaries named by the last surviving owner.

Does a TOD Account Have to Be Paid Equally to the Beneficiaries?

If more than one beneficiary is named by the TOD account owner to receive the assets remaining in the account after the owner dies, then the beneficiaries will receive the balance of the account in equal shares. For example, if four beneficiaries are named, then each will receive 25% of the assets remaining in the account, but if only one beneficiary is named, then he or she will receive 100% of the assets remaining in the account.

What Happens if a Named Beneficiary Predeceases the TOD Account Owner?

If a beneficiary named by the TOD account owner predeceases the owner, then the assets remaining in the account will be paid equally to the surviving beneficiaries. For example, if the owner names four beneficiaries and one of the named beneficiaries predeceases the owner and the owner doesn't make any changes to the account beneficiary designation, then the assets remaining in the account when the owner dies will be paid equally to the three surviving beneficiaries. But what will happen if the owner only names one beneficiary and he or she predeceases the account owner and the owner never changes the beneficiary designation? Then the assets remaining in the TOD account will become a part of the account owner's probate estate.

Is a TOD Account Right For You?

If you are thinking about establishing a TOD investment account, then consider the following:

  1. A TOD account is easy to establish. Simply ask your financial advisor how to change your investment account into a TOD account. If you do not have a financial advisor, then contact the brokerage firm that holds your investment account and ask an account representative how to change your account into a TOD account.

  2. A TOD account will pass to the beneficiaries you name outside of probate. This means that if you name all four of your children as beneficiaries in your last will and testament but only two of your children in your TOD account beneficiary designation, then the assets remaining in your TOD account when you die will only be paid to the two children that you have named in the beneficiary designation. Therefore, you need to be careful to coordinate your last will and testament with the beneficiaries you've named for your TOD account.

  3. You and your spouse can establish a TOD account together. This means that after one of you dies, the surviving spouse will have full control of the TOD account and, as such, can change the final beneficiaries of the account. If you and your spouse are in a second or later marriage and have children from other marriages, then this means that the surviving spouse can disinherit the children of the first spouse to die.

  4. You'll need to update the beneficiary designation for your TOD account as your life changes. As your life changes, so should the beneficiaries you name to receive your TOD account after you die. This is particularly important if a beneficiary you've named predeceases you or falls out of your favor.

  5. DO NOT name minor beneficiaries to receive your TOD account. Minor beneficiaries do not have the legal authority to receive money left in a TOD account directly. Instead, a guardianship will need to be established on behalf of the minor until the minor reaches the age of of majority - which is 18 or 21 depending on applicable state law.

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