Dealing with a death in the family is an emotionally draining and challenging time, but having to struggle with assets that are held up in probate as well can cause even more pain unnecessarily. To help make sure your dependents receive their inheritance according to your wishes, you may want to consider a Transfer on Death (TOD) Agreement. This legal arrangement enables you to pass ownership of certain assets in your name directly to beneficiaries you choose, thus bypassing the potential entanglements of probate.
To be eligible for a TOD Agreement, it should be a single or joint accountholder who is either a U.S. citizen or a non-U.S. citizen who is a legal permanent resident of the U.S. The beneficiary of the account can be a relative, friend, charity or trust, as long as he or she is a U.S., Canadian or a lawful permanent U.S. resident. If a beneficiary is a minor or incapacitated at the time the assets are transferred, a guardian, custodian or conservator must claim the assets on behalf of the beneficiary. You may change TOD beneficiary designations at any time. You can revoke a TOD Agreement by contacting the bank where your account is held, and completing a letter of revocation.
Probate can delay the distribution of assets. During the probate process, beneficiaries often have limited or no access to the assets. In addition, probate fees may be as much as 2% to 5% of an estate’s value. Because your attorney or executor may be required to file information with the probate court, related legal documents can become public record. Please keep in mind that in some states you may not be able to avoid certain probate fees or public disclosure. Consult your attorney regarding the laws in your area.
A TOD Agreement is not generally used to transfer assets in order to pay final expenses or taxes. In addition, TOD is not designed to handle all the issues your estate could face. A TOD Agreement provides only for transfer of assets within your account after your death.
You should plan for the disposition of your other assets. A TOD Agreement is not a will. TOD covers only certain securities held in your account. Other personal assets, such as your car, home or IRA, are not covered under your TOD Agreement. Please consult a qualified legal professional to determine whether TOD is appropriate for your estate plan.
Although a TOD Agreement allows your assets to avoid probate proceedings, it has no effect on the tax liability associated with your estate. Your beneficiaries will be responsible for any taxes owed.
There are instances when TOD may not be appropriate, including when you:
- May have federal and/or state inheritance tax or estate-tax concerns
- May have complicated estate-planning wishes
- Want to designate small percentage gifts, which will force liquidation of assets in the account
- Do not have other estate-planning tools in place to pay final expenses
You may have other unique circumstances that should be considered. Consult your estate planning professional regarding your situation. Your ShindelRock tax professional can also work with your attorney to help determine if TOD would be appropriate for your situation.