Transfer on death: What it is, and when to use it

In the realm of estate management, probate is a four-letter word. The process of distributing assets using judge and court often puts a drain on the resources that individuals wish to pass on to family and friends and leave a lasting financial legacy.

Fortunately, certain tools exist that allow you to shield your assets from probate’s reach. This article will review the rules on something called transfer on death, or TOD, so you can figure out what rights you want to exert as you manage your estate.

What is transfer on death (TOD)?

Transfer on death is a designation for a bank, investment, or retirement account (or in some cases, real estate) that account holders can use to name a beneficiary or beneficiaries (such as a spouse, children or grandchildren) who will receive the balance of the account in the event of their passing without going through probate.

Account holders can arrange to have beneficiaries receive all or part of the account upon their death. In other words, the balance of certain accounts can be split 50/50 between two beneficiaries, or 50/25/25 for three beneficiaries, and so on.

Can I make existing accounts TOD?

This process, sometimes referred to as a Totten trust, involves converting an existing bank account into a TOD account.

The answer to whether you can do this is, sometimes. Check with your bank or brokerage if you’re unsure whether your account is TOD-active or -convertible. It may also be simpler to move money from an existing bank account to one that allows for TOD.

What are some exceptions?

Some important situations and exceptions to consider:

• Some accounts cannot be listed as TOD

• Rules vary depending on whether the account is an IRA, a stock or bond, a bank account, or something like real estate

• Some accounts pass automatically to a married person’s spouse without respect to named beneficiaries, in an arrangement called “right of survivorship”

• In states with community property, a spouse either has to be an IRA’s named beneficiary, or must agree not to be

• Some states do not recognize TOD designations, so look into your state’s specific rules on TOD to make sure that it’s available to you.

• Beneficiaries named when an account is established supercede will designations in some cases.

Again, be sure to check what your specific state’s rules are, and/or consult an attorney to determine the best way to position your estate and investment portfolio.

— Bryan Kelly