A TOD account directly transfers its assets to named beneficiaries when the account holder dies. Each state has laws governing estate planning. But bank accounts, investment accounts and deeds are considered TOD accounts where assets are transferred to their named beneficiaries.
If a person only owns part of an account, their shares are transferred to named beneficiaries when they die. Investment and bank accounts will pass to surviving spouses before going into a TOD account.
A TOD account holder can identify multiple beneficiaries and allocate account assets any way they choose. For example, an account holder can open a TOD investment account and direct the division of its assets to their children who are named as account beneficiaries.
A TOD account has some advantages over a will. If there is insufficient estate planning or a will contest, the distribution of assets may have to undergo probate. A court may also name an executor for the estate and pay off remaining debts with its assets. Without a will, a probate court will distribute an estate's assets to any living relatives that the executor can locate.
With a TOD account, however, the executor merely sends a copy of the account holder's death certificate to its bank or brokerage. The account is subsequently re-registered in the beneficiary's name.
A TOD account takes supremacy over a will. TOD account beneficiaries will receive assets even if a will names other heirs to that property.
A TOD account prevents its holders from compiling more debt from probate-related fees. But a TOD cannot eliminate an estate's debt. Creditors may also seek funds in a TOD account and these accounts are subject to estate, inheritance and capital gains taxes and taxes from IRAs, 401(k) plans and other pre-investment withdrawals.
While a TOD account may be divided among several beneficiaries, it may not be divided equally. It is important to work with beneficiaries and advisors to avoid conflicts. Also, appointing a guardian or creating a trust may be recommended if there are beneficiaries under 18.
An attorney can provide options that meet a person's needs. Legal advice can help assure that an estate plan is valid and is carried out expeditiously.