What is a Transfer on Death Account?
Sometimes life seems more complicated than it needs to be. You have an asset, like a bank account. You know who you want to have the money in that account when you die. Why should you have to identify that account in your will and specify who should get the money in it? Why should they have to wait for months for probate to be completed to access the funds you meant them to have?
You could always make your intended beneficiary a joint owner of the account while you're alive. That would keep the account assets out of probate. But that comes with its own burdens: a joint owner of the account has equal access to the funds in it, even if those funds were provided by the other joint owner. Joint accounts are fine in some situations, but problematic in others.
There's got to be another way—and there is. It's called a transfer on death (TOD) account, and it bypasses both probate and the issue of an intended beneficiary dipping into funds earlier than you'd prefer.
How Do Transfer on Death Accounts Work?
Transfer on death accounts, sometimes also called payable on death (POD) accounts, are fairly straightforward. If you want to make a bank account transferable on death, you will need to ask your bank for their form, complete it, and file it with the bank. Upon your death, your intended beneficiary will need to present proof of your death (an official death certificate) and proof of their identity, to claim the contents of the account. Naturally, you will want to let your intended beneficiary know before your death that they have been designated beneficiary of the account.
TOD designations can be made with joint bank accounts, as well. Let's say you and your spouse have a joint account. When one of you dies, it will automatically pass to the surviving spouse. If you also have a TOD designation, when the surviving spouse dies, the account will pass to the TOD beneficiary.
Bank accounts are not the only assets that can be transferable on death. While not typically referred to as TOD accounts, IRAs, 401(k)s, and other retirement accounts typically require owners to designate a beneficiary to whom the account will be transferred on the owner's death. If you are married, your spouse may need to be named as beneficiary of all or part of these funds.
Securities accounts can be transferable on death as well. Pursuant to the Uniform Transfer-on-Death Securities Registration Act, which Ohio has enacted, stocks, bonds, and brokerage accounts can pass at death outside of probate. As with a bank account, the owner of the account completes a form and when ownership papers are issued, they will identify the beneficiary who will receive the asset on the owner's death.
Pros and Cons of Transfer on Death
We've already touched on some of the advantages of transfer on death accounts: avoidance of probate, preventing the intended beneficiary from getting the asset prematurely, and the simplicity of the process. Another advantage is that TOD designations are revocable, so that if you change your mind about leaving an asset to a given person, you can change or revoke the TOD designation with relative ease.
However, there are some potential significant disadvantages to TOD accounts as well. Just remember, you cannot use a TOD account to leave assets to minor children. Because minors cannot be legal owners of property in their own name, a guardianship would have to be established in Probate Court so that the assets could be managed for them until they were legal adults. Also, what happens if the designated beneficiary is incapacitated or dies first? Typically, in these situations, probate will not end up being avoided.
These last two situations can be avoided by creating a trust and making the trust either the owner or the beneficiary of any TOD or POD designations. The trust still avoids probate, and by changing the beneficiaries of the trust (say, to add a new grandchild), you don't have to remember to change all your individual TOD/POD designations.
TOD and POD accounts are but one mechanism for avoiding probate. To choose which is right for you, discuss your needs with an experienced Ohio estate planning attorney.