Too often, the way we title newly acquired assets and financial accounts is too casual. The financial advisor or salesperson asks you how you wish to take the title and who you would like to be the beneficiary of the financial account. All too often, they create a TOD, which stands for transfer on death. Therefore, the account will pass directly to your heirs without any aggravation. Unfortunately, this may devastate your well-drafted and well-thought-out estate plan (designed to protect your heirs).
What is a Transfer on Death (TOD) form?
In recent years, the financial industry has followed suit with the banking industry by introducing the option for clients to designate beneficiaries on their accounts using Transfer on Death (TOD) forms. This method can significantly simplify the estate planning process by allowing specific accounts to bypass probate and go directly to named beneficiaries.
When is a TOD helpful?
Whether it's for a spouse, child, or another heir, adding a TOD designation can seem like an efficient shortcut.
However, while TOD forms can be convenient for straightforward asset transfers, they often pose significant risks when not used carefully, particularly for larger or more complex estates. Many financial institutions offer these forms without detailed guidance, potentially leading clients to make decisions that could undermine a well-structured estate plan.
For instance, a TOD form will supersede wills and trusts, immediately transferring ownership upon death. This can unintentionally bypass important protections and provisions you've set up through more comprehensive estate planning instruments like trusts.
Unintended Consequences of TOD
Imagine a person, let's call them Bob, who has created a comprehensive estate plan, including a trust. The trust is designed to manage and gradually distribute Bob's assets to their children, providing financial support for education, housing, and other expenses. The trust also includes specific clauses to protect the assets from potential creditors of the beneficiaries and any claims from divorces.
Bob, however, also fills out a TOD form for a significant brokerage account, designating their child, Sam, as the direct beneficiary. Upon Alex's passing, the brokerage account is immediately transferred to Sam, bypassing the trust entirely. This immediate transfer means that the money in the brokerage account does not receive the protective benefits of the trust—such as creditor protection and managed distributions—potentially exposing the assets to risks Bob intended to avoid with the trust.
Consult with an attorney before filling out a TOD
Before filling out a TOD form, it is crucial to consult with an estate planning attorney. They can help you understand how such a designation might impact your overall estate strategy, particularly in relation to taxes, succession plans, and the needs of your beneficiaries. An attorney can also offer guidance on whether alternative estate planning tools might better serve your long-term objectives, ensuring that your assets are managed and distributed following your wishes without unexpected legal complications.
Remember, while a TOD form is just one piece of the puzzle in estate planning. Make sure it fits perfectly with the rest of your plan before you sign.