Do Transfer on Death Accounts Mean I Don’t Need an Estate Plan?

Transfer on death accounts (TODs) or Payable on Death Designations (PODs) can help transfer property to your loved ones without involving the Connecticut probate court. This makes them a useful tool in your estate planning tool belt, but using transfer on death accounts doesn’t mean you don’t need an estate plan. Here’s why.

What is a Transfer on Death Account?

A transfer on death account (TOD) is a financial account that transfers its assets to one or more designated beneficiaries when the account holder dies. The term Payable on Death (POD) is similar, except that it applies to different types of accounts – including insurance policies – rather than bank or investment accounts. TODs and PODs are available for:

• Savings and checking accounts
• Investment accounts
• Stock brokerage accounts
• Retirement accounts like 401(k)s and IRAs.
• Bonds
• Life insurance policies

TODs and PODs allow the account holder to name one or more beneficiaries, and divide the assets being distributed any way they like. Most often, the account holder will indicate what percentage of the accounts each beneficiary should receive. When they die, each beneficiary automatically receives that percentage of the account.

A TOD account remains in the account holder’s possession and control as long as they are alive. This means you can modify or revoke your beneficiary designation whenever you like, adding new beneficiaries, removing unwanted or deceased beneficiaries, and adjusting the shares each beneficiary receives. If the TOD is a joint account, the transfer to the beneficiary occurs when the last account holder dies.

How Does a Connecticut Transfer on Death Deed Work?

Since 2016, Connecticut has also allowed its residents to sign and register transfer on death deeds to control the distribution of real property (houses, rental homes, and other pieces of land) upon the death of the owners. A transfer on death deed works just like any other deed transferring real property, except that it does not take effect until the death of the last title holder of the property.

To use a transfer on death deed, the property owner (the transferor), must sign a deed that states that the transfer to the designated beneficiary will occur upon the transferor’s death. Then the transferor must file that deed with the town clerk where the property is located. The transferor is not required to notify the beneficiary or receive anything as compensation for the property. The transferor then retains the property – and the right to revoke the transfer – until their death. At that time, the ownership interest in the property automatically transfers to the beneficiaries listed on the deed.

Advantages to Transfer on Death Accounts

Transfer on death accounts and deeds are an effective way of removing property from your probate estate. The assets or property will transfer quickly to your designated beneficiaries, without probate court oversight, so they can use the funds and property right away to support themselves and pay for any ongoing expenses. TODs and PODs are also more straightforward and simpler to create than other non-probate estate planning alternatives, like revocable trusts. This makes them more accessible to families with smaller estates looking for ways to reduce or minimize the role the probate court plays in the administration of their estates.

Do TOD Accounts Replace the Need for an Estate Plan?

You may have heard from a financial advisor (or their website) that using transfer on death accounts means you don’t need an estate plan. While it is true that TODs and PODs remove the transferred assets from your probate estate, they cannot, by themselves, eliminate the need for an estate plan. This is because a thorough estate plan does more than just designate where your assets go when you die. TODs and PODs don’t take effect until the day the grantor dies.

However, estate planning also makes provisions for your healthcare decisions and financial provisions during your final illness. That means, even if all your financial assets are in transfer on death accounts and you have signed and registered a transfer on death deed, you may still need to supplement those designations to complete your estate plan and prepare for your disability or final expenses.

Disadvantages to Relying Solely on TOD Designations

Transfer on Death accounts are easy to set up and can reduce the probate court’s involvement. However, even after your death, there are disadvantages to relying solely on TOD accounts in place of a will or trust.

First, TODs do not apply to personal property or certain other property. Even if all your assets and real property are transferred on death, your beneficiaries will likely still need to open a small probate estate to transfer things like your vehicle, furniture, and personal belongings to your heirs after your death. If you don’t have a will, this transfer will require the Connecticut Probate Court to determine your heirs and distribute those assets according to Connecticut’s intestate succession laws. This can cause heirlooms to be sold or lost.

Next, Transfer on Death accounts are accessible to creditors, and subject to estate taxes. If you die owing money (including for your final illness or funeral and burial expenses), the creditors can try to collect their debts from funds transferred to your beneficiaries. Similarly, the IRS can impose taxes on the transfers to your beneficiaries, if the total amount transferred is large enough to incur estate taxes.

In addition, TODs supersede any will you may draft. Because transfer on death accounts remove assets from your probate estate, your will cannot control any account with a beneficiary designation on file. This means when you want to update your estate plan, you will need to file all new beneficiary designations. If you don’t, it could undo all your careful estate planning.

Finally, TODs cannot account for family members’ special circumstances. Because they happen automatically, they can transfer funds to children, which will force your family to act quickly to set up a guardian or trustee to handle their financial affairs until they grow up. Similarly, if funds are transferred to someone receiving public assistance, the sudden increase in income or assets could cause them to lose their benefits.

Get Advice on Using Transfer on Death Accounts in Estate Planning

Transfer on death accounts are a highly useful tool for reducing the size of your probate estate and putting assets in your beneficiaries’ hands quickly. However, they don’t replace the need for a thorough estate plan. Before filing beneficiary designations with your banks and financial advisors, talk to an estate planning attorney to make the best use of these accounts, and avoid the consequences of relying solely on one tool, rather than using the whole tool belt. The estate planning attorneys at Lawrence & Jurkiewicz, LLC represent clients in Hartford and Litchfield Counties. Please call us at (860) 264-1551 or contact us at your convenience to discuss your estate plan and prepare your last will and testament.