TOD Accounts Simplify Estate Planning (With Risks)


Lou is a retired sound engineer who, at his wife’s urging, is finally getting around to creating his estate plan. Because of stock holdings and a large collection of vintage recording gear, he has some substantial assets he wants to pass on to his relatively few heirs. But Lou isn’t a patient man; he wants to wrap up this estate planning and get back to enjoying his retirement as soon as possible.

So, during a recent visit to his financial advisor, he wishes aloud that there were a simple form he could fill out to complete his estate plan. Hesitantly, Lou’s advisor mentions that, in truth, there is — specifically, a Transfer on Death (TOD) account. (These arrangements are also sometimes called Payable on Death accounts.)

Indeed, with a few strokes of the pen, Lou can create a TOD account, thus completing his estate plan, and head back to the beach or golf course. Of course, as one might expect, any strategy this simple has risks.

Sprouting a TOD

Under a TOD arrangement, Lou retains control of the account’s assets during his lifetime and pays taxes on any account income, because he owns the assets outright.

At his death, the account automatically becomes the property of a designated beneficiary without passing through probate, which can be a time-consuming, expensive and public process. This transfer method also is less exclusive and simpler than a will or living trust.

For many years, TOD language was reserved for savings bonds and some bank accounts. But the Uniform Transfer on Death Security Registration Act, passed in the late 1980s, expanded the type of accounts that can be held as TOD assets to include securities and brokerage accounts as well as certificates of deposit.

Weeding out the risks

For Lou (or anyone), among the most significant risks of relying solely on a TOD account as an estate plan is that the account will trump his will. So, for example, if his will states that his wife and two children are to receive equal portions of his assets, but the TOD accounts he bequeaths them are not equal, the heirs may not agree to adjust their inheritances to account for the imbalance.

In addition, if Lou’s taxable estate exceeds $2 million or he wishes to provide asset protection, a trust may be a better option for transferring assets to his heirs. With a TOD, the potential benefits of a trust will be lost, and, at his death, estate tax liability may arise. This may be particularly troublesome if Lou’s wife survives him.

Furthermore, if Lou becomes incapacitated, a TOD won’t provide a living trust’s benefit of naming a successor trustee. And unless Lou designates a property power of attorney for the account, the process to allow someone else to manage that account can be extremely involved. Yet another limitation is that Lou’s vintage recording gear cannot be held in a TOD account.

Digging the concept

Still, by his own admission, Lou “digs” the concept of a TOD account. He can create separate accounts for his wife and two daughters and, as he wishes, maintain control of his assets for the rest of his life. It’s a simple yet elegant estate plan. Nonetheless, Lou’s advisor recommends that Lou sleep on the idea. After all, sometimes simpler is better, but sometimes it’s not.

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