What is a Transfer on Death Designation?

By November 17, 2017 General No Comments
Over the last few months, an increasing number of clients have been asking about transfer-on-death (TOD) designations and how it fits into their estate planTOD designations are quite common in the financial industry. They operate very similarly to a beneficiary designation on life insurance or a retirement account.

After the TOD designation is completed and in the event that you pass away, the account funds are automatically transferred to the person you chose to be the recipient. It is very common for banks to refer to this as a POD (pay on death) or ITF (in trust for) accounts. Though the word “trust” is utilized in that term, ITF accounts are not trusts. We will further explain this later. At many credit unions, we see them called beneficiary designations. To be clear, TOD, ITF and beneficiary designations are not the same thing from a legal standpoint, but they operate the same way at the time of death of the holder.

Most of our clients are familiar with how beneficiary designations work. Assets subject to beneficiary designations are paid to the designated person at the time of death without going through the probate process. We know avoiding probate is an important goal for many families, we are often asked the following questions:

                                      “Why can’t I just designate the people I want to receive my assets at the time of my passing?

   Why do I need to spend the time and money to put a trust in place and make sure my assets are coordinated with the trust?”

These are very valid questions!

As we stated earlier, even if specific accounts are designated as ITF for a beneficiary, such accounts are NOT a trust. That’s true for all of the acronyms mentioned – ITF, TOD and POD. This is the reason why most experienced estate planning attorneys do not consider TOD designations to be “real” estate planning. The reason behind that is because “real” estate planning will take care of all the contingencies you can think of in the event of your passing.

For instance, most TOD designations allow you to designate one person, or class of people (e.g., children), as beneficiary, you cannot name a backup or contingent beneficiary. If the person you designate is not living when you pass away, the account will then go through the probate process. If the person you have designated as beneficiary lacks legal capacity at the time of your passing, a Guardianship proceeding may very well need to be raised in order to have a Conservator established for your beneficiary through the local probate court – this process costs time and money and is often a protracted public proceeding!

A Trust, on the other hand, allows you to cover all the contingencies you can think of, and likely some that you may not think of. Among other things, you can state under the terms of your Trust exactly how you want your property to be distributed if one or more of your designated beneficiaries is not living at the time of the distribution. In the event that someone lacks legal capacity, you can have his/her portion held in trust for his/her benefit, removing the necessity of a Guardianship proceeding in order to appoint a Conservator.

Please note that a TOD designation and a Trust do not need to be mutually exclusive. They can be used together to increase convenience for clients during life and distribution in the event of their passing. For example, we regularly work with clients to have one or more of their bank accounts distributed under a TOD designation to their Trust.

We hope that this explanation of TODs helps clarify some of the different financial account acronyms we often use in estate planning! If you are interested in learning more about TODs and Estate Planning please contact us and we will connect you with our Estate Planning Attorney from Eckell Sparks Law Firm.

 

 

Disclaimer:

This is not intended as legal or tax advice and we do not give legal or tax advice. You must contact a legal or tax professional.


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About Lisa Barram

Lisa Barram is an Elite IRA Advisor and an experienced insurance and financial professional specially trained in retirement planning, providing her clients with safe money solutions, tax-free retirement strategies, social security maximization planning, income for life, and affordable alternatives to expensive traditional long-term care insurance.

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