Many people are familiar with the need to designate beneficiaries for IRA, 401(k), 403(b) and other types of retirement accounts. What about non-retirement or “non-qualified” accounts? A Transfer on Death (TOD) designation allows your named beneficiaries to receive assets from your non-qualified accounts upon your passing while avoiding the probate process. They are generally free to implement, and it is relatively simple to change beneficiaries when desired.
As with any beneficiary designations, it is important to revisit them periodically. This helps ensure that they account for life changes and continue to reflect your wishes. Other common tools like Wills and Trusts can impact how your wealth is transferred to your beneficiaries as well, so it is also essential these tools do not provide conflicting instructions.
How do Transfer on death (TOD) ACCOUNTS work when I have a will?
Simply put, a TOD designation on an investment account instructs the custodian of the account to transfer ownership to a beneficiary upon your passing. Should you have wishes for how the money is used by that beneficiary, a will can be used to communicate those wishes – a TOD designation alone does not allow for such communications.
Both a Will and a TOD designation can provide instructions on the transfer of your investment accounts upon your death, which can cause problems when the two conflict. If you already have a Will, you should ensure that establishing a new TOD does not undo what you have already put in place, so we recommend consulting with your estate attorney before making any changes to account titling.
How do Transfer on death (TOD) ACCOUNTS interact with trusts?
While a TOD directs the transfer of an account upon your passing, it has no impact on the account while you are alive. Conversely, a Trust is a separate legal entity that maintains ownership of certain assets immediately upon its establishment. Depending on the instructions given to the Trustee, those assets can be transferred to beneficiaries before or after your passing, and you can require they be spent in specified ways (e.g., only to pay for educational expenses). A TOD alone does not require the beneficiary to spend or save in a particular fashion.
OTHER IMPORTANT CONSIDERATIONS
When naming a minor as your beneficiary on a TOD account, it is important to understand how to name a custodian to make decisions on behalf of the child. It is also critical to have funds available for final bills and final tax payments upon your death. If all your assets pass to beneficiaries through TOD and Payable on Death (POD) accounts (which are used for bank accounts), then the Executor of your estate may not have sufficient funds to cover these final expenses without going back to the beneficiaries. This is not a problem if the Executor is the sole beneficiary, but it could create unintended complications when that is not the case nor appropriately planned for.
Guidance for Structuring Your Wealth Transfer Plan
If you’re evaluating whether TOD registrations, Trusts, Wills, or other estate planning tools are appropriate for your situation, thoughtful coordination is essential. Beneficiary designations can be powerful, but they should work together with the rest of your estate and tax planning to ensure your wishes are carried out efficiently and without unintended consequences. If you would like guidance building a comprehensive estate planning strategy and ensuring it aligns with your investments and other financial planning goals, we at Godsey & Gibb Wealth Management would be happy to help. Please feel free to contact us by filling out our interest form or calling us at (804) 285-7333 to schedule a consultation.