By Ryan Yuhnke
Estate planning can be complicated, so there’s a tendency for many people to put it off as long as possible. The good news is that there are easy options out there that can save you time and money and help your beneficiaries avoid the stress of probate. One such option is the transfer-on-death (TOD) account. Read on to learn more about TOD accounts and how to tell if they’re the right choice for you.
What Is Transfer-on-Death?
A transfer-on-death (TOD) is a beneficiary designation that allows you to name someone to inherit your investment accounts without going through probate. It’s similar to a payable-on-death (POD) bank account, which immediately transfers the bank balance to a named beneficiary at death.
The major difference between a TOD and POD is that a TOD is used for investments like stocks, bonds, and mutual funds, while a POD is used for bank balances like checking and savings accounts.
How It Works
The Uniform Transfer-on-Death Securities Registration Act allows, but does not require, brokerages to offer the TOD designation. Every state except Louisiana and Texas has passed this act.
Anyone can set up a TOD, as long as at least one of the following is located in a state that has passed the act:
- Your legal residence
- The stockbroker’s principal office
- The registering entity of the stock or stockbroker
- The office of the transfer agent
Since most of our clients live in California, which has passed the act, they would all be eligible to add TOD to their investment accounts.
If you decide to add TOD to your investment account, you must contact your specific broker for instructions on how to set it up. Generally, the broker will require you to fill out a form officially naming your beneficiaries.
At that point, the name on the account will change from your name alone to your name plus TOD plus the beneficiary’s name. For example, if John Smith wants to name his daughter Katie as TOD beneficiary, his new account name would be “John Smith TOD Katie Smith.”
At death, any assets held as TOD will automatically transfer to the named beneficiary or beneficiaries if more than one is named. To claim ownership of the assets, the beneficiary will be required to present the broker with a certified copy of the death certificate and proof of identity.
Benefits
There are many benefits to using a TOD designation:
- Simple to use
- Avoids probate
- Generally free (unless your broker charges a fee to change beneficiaries)
- Easy for beneficiaries to claim ownership of assets at the original owner’s passing
- Most brokers allow you to name multiple beneficiaries and they can have unequal shares. For example, you can name your children as 50% beneficiaries so they will both receive 50% of the account. You can also name beneficiaries with unequal shares, say 50% to your only child and 25% to each of your two siblings.
- You can also name contingent beneficiaries in case you outlive your first-choice beneficiary. If you listed your older brother as the sole TOD beneficiary but he passes away before you, your account will no longer have a beneficiary unless you name a contingent (back-up) beneficiary to take his place.
Other Considerations
Since California is a community property state, any assets held in an individual brokerage account will be considered one-half owned by your spouse if they were purchased with money earned while married.
If you plan on adding a TOD designation for a beneficiary other than your spouse, you should have a valid written agreement from your spouse waiving their ownership claim. Without this in place, your spouse could claim half the assets in the account at your death.
Also, keep in mind that if you name a minor child as a beneficiary, you should also consider naming an adult to manage the assets until the minor reaches adulthood. For example, if John Smith wants to leave his assets to his minor child, Katie Smith, but would like to name his sister, Jane, as a custodian on the account until Katie reaches age 18, on his TOD registration, John would name the beneficiary as “Jane Smith, as custodian for Katie Smith under the California Uniform Transfers to Minor Act.”
Making the Right Choice
Adding a TOD designation to your investment accounts can be a great way to protect your assets and your beneficiaries from the hassle and expense of probate. At Court Investment Services, we can help you navigate the estate planning tools available to you, including TODs and more. To learn more about how we help professional fiduciaries manage estate-held assets, schedule an appointment by contacting us at (800) 880-2760 or Kitty at kchu@CourtInvestmentServices.com.
About Ryan
Ryan Yuhnke is founder and Principal at Court Investment Services, an independent, fee-based investment firm that serves attorneys and fiduciaries as they manage estate-held assets. With two decades of experience, Ryan’s proactive, relationship-based process saves his clients time and money while putting them first in everything. He provides services and support to help attorneys and professional partners oversee and manage special-needs trusts, estates, conservatorships, guardianships, and other court accounts, including IRAs, 401(k)s, and all manner of retirement accounts that also fall under his clients’ management. Ryan is known for his commitment to excellence and transparency and his deep knowledge of probate laws, court compliance, and strategies to keep assets safe while abiding by all court and probate code directives. Ryan’s goal is to make his clients’ lives easier, providing investment support and education along the way.
Ryan has a bachelor’s degree in economics from the University of California, Irvine, and built his career working in banks, national investment firms, and registered investment advisory firms (RIAs.) Prior to starting CIS, he earned the title of First Vice President, and Portfolio Management Director while employed at Morgan Stanley in Newport Beach, CA. When he’s not working, Ryan can be found traveling to experience new cultures and environments, focusing on personal development through mental, social, spiritual, emotional, and physical growth, and most importantly enjoying quality time and creating new memories with family and friends. To learn more about Ryan, connect with him on LinkedIn.
