Losing a cherished member of your family is an emotional time, and it’s never easy. Not only is it hard dealing with the personal loss, but sudden medical bills, funeral costs, and other unforeseen expenses can follow it. And don’t forget the dreaded probate process! However, passing your assets to your heirs does not have to be a nightmare if you plan ahead. After all, you worked hard to build your estate, so why not protect it?
What Is Probate?
Probate is the court process of validating a will and appointing a personal representative to manage the estate. Probate property is property that passes through the will and the probate process (e.g., cash, stocks, land). In many cases, not only can probate lack privacy, but it also tends to be costly, inconvenient, and time-consuming (in some cases, assets can be tied up for more than a year).
What Is a Transfer on Death Agreement?
A transfer on death (TOD) agreement is an estate-planning tool that allows you to avoid the disadvantages of probate by establishing a list of beneficiaries for certain assets, such as an auto, a house or investment accounts. The assets are then transferred directly to your beneficiaries following your death, since TOD agreements supersede other arrangements regarding those assets listed in your will or trust.
How Do TODs Work, and What Types of Accounts Are Eligible?
The laws surrounding TOD agreements can vary by state. For example, in states with common property laws, you will need a signed release from your spouse if they are not a joint account owner or the beneficiary on the TOD account. Another example to consider is that only some states allow you to have a TOD deed for a property, which is why it’s important to connect with an experienced financial advisor to walk you through which options are available to you.
In most cases, only Single Name, Joint Tenant, Sole Proprietorship, and Community Property accounts are eligible. You retain complete control over your accounts and simply list the names of your adult beneficiaries on the TOD agreement. You can revoke, modify, alter percentages, and change beneficiaries at any time. Most states do not permit beneficiaries that are non-U.S. Citizens, minors, and animals. Trusts, UGMA, Corporate, Tenants in Common, non-U.S. Citizen, and IRA accounts are not eligible for TOD.
What If You Have a Will or Trust?
TOD agreements should never be used as a substitute to a will or trust; instead, they should be used to supplement your current estate plan, since personal assets such as jewelry and collectibles will not qualify for TOD agreements. TOD agreements may help you bypass probate, but make no mistake, your estate will remain accountable for any estate taxes due.
Remember: TOD allows you control over all the assets, but the taxes due on income and dividends will still be your responsibility. The assets registered under the TOD service will still be included in your taxable estate and subject to the applicable federal and state taxes. It is also essential to explain the course of action to your beneficiaries, as they will need to contact your financial advisor upon your death.
Should I Consider Establishing a Transfer on Death?
If avoiding the costs and the above-mentioned disadvantages of probate is a concern of yours, then establishing TOD agreements could be worth the time and fees. You should consult your attorney and/or estate planner to discuss your personal plan.
This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.
