A transfer-on-Death (TOD) designation is a form of beneficiary designation. When used, a TOD designation “transfers” the ownership of an asset to a beneficiary. TODs are widely available for non-qualified securities and brokerage accounts. In some states, TOD designations can also be used to transfer automobiles or real estate.
A TOD can be added to an investment account by using a form provided by the custodian where the funds are being held. If your state allows, a TOD can be added to the title of a vehicle by obtaining a Transfer on Death form from the Bureau of Motor Vehicles. Adding a TOD to real estate is generally more complex. That’s because it often requires preparation of a new deed for the property being designated. A recording or filing fee is also required.
TOD designations have a number of advantages. Like PODs, they are relatively easy to establish and use. You also retain full control of the asset during your lifetime. That means that you can change the beneficiary, close the account or sell the asset if you choose. The beneficiary, however, cannot be changed after your death. To claim the asset, your beneficiary will generally need proof of identity along with a certified copy of your death certificate. They will not need an attorney or court approval, as is often the case with probate assets. TODs can also be difficult to contest because they transfer by operation of law, which means that they bypass your estate.
While TODs can provide a number of advantages, they also come with certain disadvantages. Because these types of transfers bypass your estate, the transfer could contradict instructions in your will about how you wanted certain assets distributed. TOD’s also ignore named, but deceased beneficiaries. Meaning that should a beneficiary predecease you, his or her share of the asset will be transferred only to the surviving beneficiary. This could inadvertently lead to disinheriting an otherwise intended beneficiary, such as a grandchild. TOD designations are also only available for certain types of assets. In many cases, the availability of TOD will depend on your state law.
Another significant disadvantage of a TOD is that it provides no protection in the case of incapacity. As the title implies, transfer-on-death designations only take effect upon “death”, and not upon incapacity. Therefore, your beneficiary will have no control or authority over the asset should you become incapacitated.
While TODs can be an effective tool in the estate planning process, both their advantages and disadvantages should be carefully considered before naming a TOD beneficiary.