TOD – How Does Transfer on Death Fit in Estate Planning? -

Charles is an Army veteran and recent client. He came to us for help because he wanted to maximize his Veteran’s benefits. He asked the common question, “What is TOD, and should I use it in my estate plan?” Specifically, he wanted to know more about Transfer on Death as a means of avoiding probate.

While TOD has its place, its limitations often prevent people from protecting their family’s interests and accomplishing their estate goals.

What is TOD?

TOD is simply an abbreviation for Transfer on Death. It’s a designation that’s typically used when titling personal property and financial accounts. The common objective is to avoid the pain and expense of probate.

Probate is a process used by the courts to properly dispose of an individual’s estate after they pass. Because it’s a long, tedious, and expensive process, most people try to avoid it. No client has ever told us they enjoy it.

While Transfer on Death does a great job of avoiding probate, there are downsides to be noted. It’s more of a blunt instrument. Most people need the finer treatment of a living trust to accomplish their estate planning goals.

How does Transfer on Death work?

One of the most common uses of TOD relates to motor vehicles. In Missouri, for example, the title application allows you to designate an individual to take immediate ownership of your car upon your passing. The same is true for an RV, boat, motorcycle, or any other licensed vehicle.

Real estate and financial accounts are other examples where TOD is applied in order to avoid probate. Specific rules vary from state to state and from one institution to another, but more than one party can sometimes be designated.

How does TOD apply?

Transfer on Death designations are applied to just about any kind of personal property. Real estate, cars, recreational vehicles, and investment accounts are all good candidates for TOD designations.

There are some downsides to using TOD

Transfer on Death is commonly used to avoid probate. In avoiding probate, you save your family and other beneficiaries a great deal of trouble. But you must understand the limitations. In many cases, they can create more trouble. Note these points:

Named beneficiaries in a TOD take priority over anything stated in your will.
If a beneficiary passes away, or if you want to make changes, each title or TOD account has to be changed. We don’t know anyone who wants to spend more time with the DMV.
Minors cannot legally take possession of investment accounts. If named as beneficiaries, a conservatorship must be established, requiring a different kind of probate.
In some cases, a beneficiary can legally take possession of personal property, but should not have access until a certain age. TOD offers no help in that regard.

Am I better off using a living trust to avoid probate?

A full, proper estate plan is the better option in most cases. While a trust takes more time and expense to establish, it offers two major advantages over TOD: long term convenience, and precise planning.

Long term convenience means that you don’t have to rework everything on a granular level. Here’s an example: Charles, in addition to his financial accounts, owns his home, a cabin on the lake, two cars, and a boat. Let’s assume he’s using TOD. If one of his sons passes before Charles does, each one of those items must be reworked if probate is to be avoided. A trust, however, controls everything from one central document. Others, like grandchildren, can be named as successors.

Precise planning offers great flexibility and innumerable options. In fact, a trust can be drafted to accommodate your most detailed wishes. Consider these examples:

Beneficiaries can be protected in the event of divorce or bankruptcy. Receipt of assets can be delayed until those issues are resolved.
Assets can be held or progressively issued to prevent younger beneficiaries from misusing them.
Assets can be characterized in a way to help veterans or other individuals maximize government benefits.
Successors can be specified. If a beneficiary passes, their children can be named in proportions determined by you. Certain individuals can also be excluded if necessary.

Proper estate planning for the common family

Estate planning is not only for the well-to-do. We regularly serve average families with modest means. Our clients, regardless of their degree of personal wealth, have one thing in common; they want to live out their days with the assurance that their resources will be used as they see fit, and protected for the benefit of future generations.