There are various components to the titling of assets: One is using a transfer on death (TOD) designation, generally used for investment accounts, or a payable on death (POD) designation, used for bank accounts, which act as beneficiary designations, stating to whom account assets are to pass when the owner dies.
Adding a TOD, without a Trust, may help you avoid probate and direct assets to a surviving beneficiary unless the beneficiary predeceases you. In that circumstance, we cannot be sure what will happen if there is a predeceased beneficiary, as the path and options would depend on the TOD form and related agreement.
The potential downside is the beneficiaries and estate executor might not be aware of all the TODs. The accounts could become lost property after the owner passes away if the beneficiaries don't claim them. To avoid that, an owner should keep a record of all TOD accounts.
Are TOD Accounts Taxable to the Beneficiary? While a transfer on death designation can help avoid the probate process, the assets are still subject to applicable estate taxes, capital gains taxes, and inheritance taxes.
Transfer-on-death accounts are allowed in many states, including California. Using these accounts can make it possible for the loved ones of deceased individuals to avoid probate court.
However, TOD does not avoid taxes. The owner's death exposes transfer-on-death accounts to capital gains tax, estate tax, and inheritance taxes.
Just like a TOD deed, assets held in living trusts bypass probate, allowing them to be distributed more quickly and privately. The primary way they differ from TOD deeds is that living trusts can hold all types of assets, not just real estate.
TOD Account Beneficiaries
TOD account holders can name multiple beneficiaries and divide assets any way they like.
Designated beneficiaries receive the funds without having to wait for probate to conclude, which can take months. A POD or TOD account allows loved ones to get money almost immediately. Typically, all they need to provide is the death certificate and identification to the account-holding institution.
Unless you have a complex situation or have specific concerns, you likely won't need a lawyer to create a TOD deed. But you will need to make sure that the TOD deed you make is valid in your state, since each state's rules are a little different.
Alternatives include well-structured wills and living trusts. Wills offer flexibility and judicial oversight through a probate, while living trusts offer control over assets during the grantor's lifetime, minimize post-death legal complexities, and potentially provide tax benefits.
“Typically, TOD accounts are investment accounts that will transfer to the beneficiary when the account owner dies." Transfer on death accounts are similar to “payable on death" (POD) accounts, with both transferring assets to beneficiaries after the account owner dies.
A TOD designation supersedes a will. For bank accounts, you can set up a similar account known as payable-on-death, sometimes referred to as a Totten trust. Your beneficiaries can't touch the account while you're alive, and you're free to change beneficiaries or close the accounts at any time.
Unlike joint tenancy with the right of survivorship, the transfer on death beneficiary for property does not automatically transfer the title to the designated beneficiary. If there is another co-owner, most states give that joint tenant a certain amount of time to challenge the title on the property.
Key Takeaways. Putting TOD beneficiaries on accounts does not mean that you or your heirs avoid estate taxes. The federal threshold for estate taxes is very high (as of 2024, it is $13.61 million), and few states impose this tax. 34 This means that the vast majority of estates don't have to pay estate taxes.
A beneficiary form states who will directly inherit the asset at your death. Under a TOD arrangement, you keep full control of the asset during your lifetime and pay taxes on any income the asset generates as you own it outright. TOD arrangements require minimal paperwork to establish.
Timelines for transferring property after the owner's death vary by state and can range from a few months to over a year.
Naming a trust as a beneficiary is a good idea if beneficiaries are minors, have a disability, or can't be trusted with a large sum of money. The major disadvantage of naming a trust as a beneficiary is required minimum distribution payouts.
Trusts can be used to only allow the beneficiary to receive the bulk of the inheritance when he or she is old enough to spend it wisely. The list is not all-inclusive. The bottom line is that a trust provides far more potential asset protection than an outright inheritance.
A living trust, unlike a will, can keep your assets out of probate proceedings. A trustor names a trustee to manage the assets of the trust indefinitely. Wills name an executor to manage the assets of the probate estate only until probate closes.
This step-up is a significant tax advantage that can prevent your family from being hit with a huge capital gains tax bill. When a home is inherited, the sale of the property is subject to capital gains taxes.
Any assets held in a TOD account are included as part of the owner's taxable estate. As described above, this means that these assets could make the estate subject to estate taxes.
Currently, TOD deeds (or similar alternatives) are offered in 27 states and the District of Columbia: Alaska, Arizona, Arkansas, California, Colorado, Hawaii, Illinois, Indiana, Kansas, Minnesota, Missouri, Montana, Nebraska, Nevada, New Mexico, North Dakota, Ohio, Oklahoma, Oregon, South Dakota, Texas, Virginia, ...