Should I Use Transfer on Death Accounts or a Trust?

Transfer on Death Accounts
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Transfer on Death accounts and trusts can be useful for assets bypassing probate.

Not all assets are treated the same in estate planning.

Some assets are best distributed through probate via a last will and testament or outside of probate via a revocable living trust (RLT).

Other assets pass through beneficiary designations or transfer on death (TOD) designations.

According to a recent Kiplinger article titled “TOD Accounts Versus Revocable Trusts—Which Is Better?,” people are often torn between the TOD designation and RLT approaches.

Transfer on Death Accounts can bypass probate.
Transfer on death accounts could leave the assets vulnerable to financial liabilities of the estate.

Although TOD designations and fully-funded RLTs both avoid probate, they function differently.

A TOD designation is often added to bond, brokerage accounts, stocks, and other non-retirement accounts.

Similar to TOD designations, payable on death accounts (POD) are used typically for cash bank assets.

With a TOD designation, the owner of the account can designate a beneficiary on the account to receive the funds after the death of the account owner.

Because the beneficiary directly receives the assets, such assets are kept out of the estate and are immediately available to the beneficiary rather than having to wait for probate administration.

To receive the funds, the beneficiary must contact the financial institution of the transfer on death account and provide both proof of his or her identity and an original death certificate for the account owner.

After these have been supplied and verified to the satisfaction of the institution, the assets will distributed to the beneficiary.

However, TOD designations are not an estate planning panacea.

Such designations are not always perfect at protecting TOD assets from probate.

Some states may have provisions in the law to allow for the estate executor to seek contributions from POD and TOD accounts to pay for debts or liabilities from the estate, final income or estate taxes, or the costs of administering the estate.

If the beneficiaries of these accounts do not voluntarily contribute to these payments, the executor of the estate could file a lawsuit to hold them personally responsible for making the contributions.


This can be even more complicated if the funds from the POD or TOD have been spent or tied up in a divorce or lawsuit.

To make up for these funds, the court make seek other personal assets of the beneficiary.

Another problem your beneficiaries of POD or TOD accounts could face is potentially rendering them ineligible for public assistance benefits.

If your beneficiary has special needs, you could unintentionally disqualify your loved one from important public assistance like Medicaid.

A RLT can provide greater protections for your assets and your heirs than transfer on death accounts.

If you create a RLT, you become the grantor.

Should you become incapacitated, your trustees can seamlessly use the assets for your benefit.

With POD or TOD accounts, you will require a general durable power of attorney for another person to have authority to manage these assets upon your incapacity.

If the general durable power of attorney is old or does not meet the language specific to the state where the financial institution resides, the bank or institution may refuse to honor the authority of your appointed attorney in fact (i.e., agent).

With a RLT, you can bypass probate and create more specific instructions for the use or distribution of the assets held in the trust, even creating a supplemental needs trust to avoid jeopardizing the public assistance benefits of a beneficiary.

Whether you choose to utilize TOD designations or a RLT, it is important to work with an experienced estate planning attorney.

He or she can educate you on the merits of either approach, as well as other alternatives to consider.

ReferenceKiplinger (Dec. 2, 2021) “TOD Accounts Versus Revocable Trusts—Which Is Better?”

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