A transfer-on-death (TOD) account is a simple way to pass on financial assets without going through probate. This allows beneficiaries to inherit funds quickly and without court involvement. TOD accounts can apply to bank accounts, brokerage accounts, and, in some cases, real estate, depending on state laws.
One major benefit of a TOD account is that it bypasses probate, making asset transfers faster, more private, and less expensive. Setting up a TOD account is easy and often more affordable than creating a trust. The account owner retains full control during their lifetime and can update beneficiaries as needed.
However, TOD accounts may not be the best option for everyone. In complex family situations, disputes can arise if beneficiaries are not named equally. For large estates, TOD accounts lack tax advantages and the level of control that a trust provides. If a beneficiary passes away and no contingent beneficiary is named, the assets may still go through probate. Additionally, life changes such as divorce or estrangement can result in outdated beneficiary designations, potentially leading to unintended consequences. TOD accounts are also not ideal for minors, as they cannot legally manage inherited funds, or for beneficiaries with significant debts, as creditors can claim the assets.
To ensure TOD accounts align with overall estate plans, they should be reviewed regularly, especially after major life events. It’s also important to understand state laws, as regulations vary. Setting up a TOD account is usually straightforward—account holders must check eligibility, choose beneficiaries, complete the required forms with their financial institution, and update information when needed.
Read more about how these accounts are useful estate planning tools.