In addition to wills and trusts, there are many tools available to you in developing an estate plan. While different tools are appropriate for different asset classes, family structures, and goals, it is important to know about the possibilities. In this article, I’ll focus on the Transfer on Death, or TOD, designation, which can help streamline the process of transferring assets to your heirs.
Generally used for stocks, bonds, mutual funds, or investment accounts, the TOD provides for the seamless transfer of assets to a designated recipient, either an individual or an entity, at the time of your death. Like a trust, the TOD designation is private and nearly automatic, helping your heirs avoid the cost and often time-consuming process of probate. A TOD is also very simple to set up: it’s as easy as signing a form supplied by the institution holding your securities.
Using a TOD to speed up the transfer of assets to your heirs is not only useful for avoiding probate. It also allows your recipient to trade the account or access funds quickly if it becomes necessary. In addition, a TOD designation is much harder to challenge than a will, helping you to ensure that your assets go to the individual or entity, such as a charity, that you designate. In some states, TOD accounts or assets are even excluded from rules that govern the amount you can leave to charity or your spouse. These exceptions can help tailor the estate planning process for those with unique needs, family structures, or preferences. Finally, it is important to note that the TOD is fully reversible; you can change or remove the designation at any time prior to your death, in almost all cases without cost.
As with any estate planning tool, there are several key points to keep in mind when it comes to the TOD designation. First, TODs can generally only be used for investable assets, such as stocks, bonds, mutual funds, or securities trading accounts. Additionally, some states do not permit TOD designations at all, while others allow you to transfer additional assets, such as real estate, to your intended transferee. Given the variation in regulations among states, it is important to understand which rules apply to your individual situation before considering a TOD.
Secondly, remember that the TOD will not reduce your estate tax burden or other fees arising at death, so it is not an appropriate tool for reducing those costs. Also, creditors can still pursue TOD assets to settle any outstanding debts at the time of your death. Both of these issues should be considered as you craft an estate plan, as a bit of planning can help you to avoid additional pain and confusion later on.
Used alone or in conjunction with a trust or will, the TOD can be a powerful tool in your estate planning toolkit by speeding up and simplifying the transfer of assets to your heirs. As with any estate planning tool, it is important to ensure that a TOD is the right solution for your particular situation, so I recommend consulting with an experienced professional prior to setting up a TOD designation.
New to estate planning? Read my introductory article to estate planning basics. For more information about TOD designations, I recommend this guide to TODs as a will substitute. Would you like to learn more about other estate planning tools? Check out the guide to Common Types of Will Substitutes, which includes information on trusts, TODs, and several other tools.
If you are seeking detailed information about rolling over your 401(k) or about managing your IRA, I highly suggest downloading my free eBook, “10 Tips You Need to Know About Your IRA Rollover”. This short book is packed with critical information that will help you make the right decisions about your retirement savings.
Written by Bradford Pine
Bradford Pine Wealth Group – New York City Financial Advisors
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