Adding Transfer on Death Instructions
What is the meaning of the term Transfer on Death?
Why is it important?
Is it relevant for me?
Transfer on Death (“TOD”) privileges are defined as manual instructions ‘attached’ to an account by the owner a.) dictating how assets are to be distributed in the event of their death and b.) allowing their beneficiaries to receive these assets without having to go through the probate process. It’s the latter feature that we find most important.
TOD instructions, similar to Payable On Death (POD) available through most banks, can be advantageous because probate can entail significant expense, time and complexity. By ‘attaching’ a TOD to an account, beneficiaries enjoy the following benefits:
They know exactly what and how much they will receive from the account, usually in terms of percentage of assets.
- They are not required to hire (and pay) an attorney to process the estate.
- They are not required to wait for a local court to approve and process the decedent estate (often generating a Letter of Testamentary that confirms the legitimacy of the will).
- They are not required to submit a claim to assets in the event of a missing or deficient will (or none at all).
By establishing a TOD, an account owner usually saves their loved ones a great deal of stress. This can be especially advantageous if the beneficiary is unfamiliar with the estate makeup or is located outside the county of the deceased. We find that dealing with any court remotely is generally something to be avoided if at all possible.
Advantages
When the concept of TOD is first introduced, we find many clients become easily confused about whether they can or should attach a TOD to their account. This is understandable for three common reasons.
First, many clients wrongly assume that beneficiaries are already assigned to their account. This is because qualified accounts (usually tax-advantaged retirement accounts like IRAs, SIMPLE IRAs and 401ks) by default require a beneficiary to be assigned during the account opening process. If accurately completed, those instructions serve in a similar capacity to TOD. (To be technical, TODs actually replicate beneficiary designations of qualified account.)
Furthermore, some clients initially profess that they are comfortable letting the proceeds of a nonqualified (not tax-advantaged) account like an Individual or Joint account be distributed per dictates of their will. The problem, of course, is that a will must go through probate, as mentioned above. These clients simply do not know that having a signed TOD on file for a non-qualified account is almost always a more efficient way to distribute assets. Most are unaware of the time and expense involved in probate unless they have navigated it themselves as the beneficiary of someone else’s estate.
Lastly, clients often ignore attaching a TOD to their Joint account (usually with a spouse) because they rightfully recognize how rare it would be to lose both account holders in the same event (a car accident or similar.) They assume the second joint owner will take ownership in the event of their passing, which is of course true.
Lastly, many people become easily overwhelmed by the concept of estate planning, or simply refuse to address matters of life or death. Some believe they don’t have enough to worry about, while others have never been through it and simply assume the process is simpler than it really is.
As a result, we make great efforts in our practice to attach TOD privileges to any non-qualified account where our clients would prefer to avoid probate for their beneficiaries (and often when they are indifferent). Unfortunately, we have experienced scenarios where our client account was the only asset required to go through probate and an attorney charged what seemed likea very high rate simply to acquire a Letter of Testamentary. Depending on the size of the account, this fee can represent quite a large proportion of the account value.
My personal predilection for TODs is quite high because my first employer charged several hundred dollars both to establish a TOD for the account owner and then again to process it for the beneficiaries. Our existing custodian, TD Ameritrade, levies no charge for either transaction, so for us it seems like a smart financial move.
Other Benefits
In addition to the above reasons, account owners should also consider the following factors when determining whether a TOD is right for them:
A TOD supersedes other estate documents like wills and trusts. In simple terms, a TOD beneficiary designation will override all other instructions, including those created after the submission of the TOD. For example, if a client specifies their children as beneficiaries of an account in a will, but later selects grandchildren in a TOD, the grandchildren will be the ultimate recipients (assuming no additional factors or legal judgments)
If the deceased account owner already anticipates that all or some of their estate to go through the probate process anyways (for any number of legitimate reasons), then they may deem a TOD to be unnecessary, excessive or even in conflict with other wishes.
If a client wishes to divide their entire estate and all assets equally through a trust, it is neither uncommon nor unreasonable to skip a TOD to avoid any confusion. Conversely, we often see clients who purposely elect to ‘carve off’ their investment account for a specific beneficiary in a different proportion to their trust, and a TOD solves this dilemma well. One example would be a trust that dictates the majority of an estate to go to children, but a TOD directing account assets directly to the grandchildren or a philanthropic entity.
Similarly, altering a trust can entail significant time and expense, while a TOD can be changed easily and for free. For this reason, clients often add a TOD even if a trust already exists. In situations such as a mixed marriage (for instance, involving children and stepchildren) or a potential divorce of a beneficiary, it can be useful to alter the TOD quickly.
Pro-Rata vs. Per stirpes
An aspect of TOD (or any other beneficiary conversation) that is rarely a concern but is worth mentioning is the distinction of dividing assets in one of two methods:
- Pro-Rata (Or Standard) - In the event that a beneficiary predeceases you, and the TOD is not amended, their percentage will be divided among the remaining primary beneficiaries. For example, if three children are to receive 33 1/3% of the proceeds but one child passes away prematurely, the Pro-Rata account then divides 50/50 between the two remaining children.
- Per Stirpes - In the event that a beneficiary predeceases you, their portion passes on to their family and is not divided among remaining named beneficiaries. In this case, if three children are named equally as above, but one child passes away first, their family (spouse and children) would receive the 33 1/3% rather than the amount being divided equally between the remaining two children.
In my experience at multiple firms, Pro-Rata tends to be the most popular option for most clients and is typically the default election for most firms. However, it’s always prudent to review this with your advisor or trusted financial counsel to ensure both that you understand the difference in designations and that your accounts represent your preferences accordingly.
Summary
No matter your age, it is important to have your finances and assets in order to prevent any of your estate going through probate in the event of your passing. Ordinarily, a surviving spouse is the Primary Beneficiary and children are contingent. However, TOD instructions can be used to establish trusts and give to charitable institutions as long as the assigned allocation percentages equal 100%.
Properly following existing rules and naming all beneficiaries clearly will ensure that this process is quick and that all assets go where you intended for them to be. Reviewing these assignments semi-annually or on an annual basis can give peace of mind knowing that everything is in its place.
Do you know if you have TOD privileges established on your accounts?