It is typical for someone to worry about making sure their assets get passed to their loved ones when they die. While it would be nice if this happened automatically, the process isn’t always so simple. 

In order to ensure that investments transfer to surviving family members or other chosen beneficiaries, a transfer on death account must be created with a bank.

What is a Transfer on Death Account?

A transfer on death account is a common way to avoid the stressful probate process for a home, investment and bank accounts. The process of setting up a transfer on death account is straightforward. It requires completing a form and designating beneficiaries who can claim the assets as soon as the account holder passes. 

In most cases, the chosen beneficiary will need to go to the financial institution where the TOD account is established and show their ID. The beneficiary will also need to show them the death certificate and fill out some paperwork. After this, the beneficiary should be able to claim the assets relatively quickly.

Payable on Death vs. Transfer on Death Accounts

When someone passes, their assets might have to go through the probate process before they’re distributed to their family. Probate can be lengthy, expensive, and stressful for everyone involved. In order to avoid it, a payable on death or transfer on death account can be established. 

Keep in mind that if a primary or secondary beneficiary is not named, or if the named beneficiaries die before the account owner, the accounts will have to go through probate. The next section of the article will focus on the differences between payable on death and transfer on death accounts.

Payable on Death Accounts

Most types of bank accounts can be set up as a payable on death account as a legally valid method for avoiding probate. The account owner must file the necessary forms with their bank to set it up. When they pass, their designated beneficiary will receive the funds in the account. 

With a payable on death account the funds are still accessible and the account owner is free to do as they please while they are still alive. The beneficiary has no right to access the funds until the account owner dies. Also, the account owner can change the beneficiary any time they want.

A POD account will only transfer the balance in the account, not savings accounts or any stocks or bonds. In order to do that a transfer on death account must be established.

Transfer on Death Accounts

Similar rules apply to transfer on death accounts as payable on death accounts. With a TOD arrangement, the owner can pass their bonds, brokerage accounts, or stocks to their heirs (or designated beneficiaries) without probate. Similar to a POD account, a TOD account requires registering for ownership and choosing a beneficiary.

The beneficiary can’t access the securities while the account owner still alive. The account owner is free to sell or give away their assets, close your account, or change the beneficiary at any time. The securities will only become available to the chosen beneficiary once the account owner has passed.

Transfer on Death Investment Accounts

Most investment accounts are easy to transfer as long as the chosen beneficiary is capable of managing the investments. If no beneficiaries are named on a TOD account, or the chosen beneficiary passes away before the account owner and the owner did not name a new beneficiary, then the account will likely have to go through probate. 

If a will states anything about transferring or managing investment accounts, the beneficiaries chosen will take precedence over those statements. Once the heirs have been designated, they will receive the assets once the account owner passes.

Transfer on Death Accounts and Taxes

It’s important to be aware of any potential tax consequences of transfer on death accounts. When receiving income from a transfer on death account, the beneficiary is responsible for any related taxes, in addition to capital gain tax. Once the account owner passes on, the account is subject to inheritance and estate taxes. Let’s look at these categories below:

Capital Gains Taxes

A TOD account might come with capital gains benefits. If the brokerage account has appreciated stocks that the account owner sold before passing on, the beneficiary would most likely owe taxes on their capital gains.

Estate Taxes

When beneficiaries of an account receive property, the government may impose estate taxes on it. If the state imposes its own tax, the estate value must exceed the exemption value to be subject to taxes.

Inheritance Taxes

When beneficiaries receive money or property, the state you live in may impose an inheritance tax on it. Only a few states still do this, though, and there’s a high threshold amount before inheritance taxes are owed. So, in all likelihood, a beneficiary won’t need to worry about owe any inheritance tax.

Should You Get a TOD Account?

TOD accounts are easy to set up. Simply ask your investment company if such an account is right for your personal goals. You’ll have a choice between opening a new account or changing your current account to a transfer on death arrangement. 

You can also establish a joint TOD account that will pass to your beneficiaries once each owner passes on. If you’re married and either you or your spouse dies, the one who survives will be able to control the account and change the heirs.

Keep Your TOD Beneficiaries Updated

Life is full of unexpected changes, and your TOD account should stay updated along with your current situation. If your chosen beneficiary passes before you or you decide to remove them from the account, you’ll need to choose someone else.

Keep in mind that if you name a minor as your TOD account beneficiary, they won’t have legal authority to get your investments once you pass. Instead, the minor will have to wait until they’re 18 to access the investments. You’ll likely be better off designating adults as the beneficiaries of your TOD account.

Have Questions about TOD Accounts?

Estate planning law and beneficiary rules can be complicated, and it’s easy to overlook important details. You might be wondering how to make a claim against a transfer on death account or how to ensure your kids get your investments when you pass. 

Working with an estate planning attorney for guidance and advice is the best idea for making sure you cover all your bases.

Receive Help With Estate Planning in Arizona

Preparing for your passing can be more complicated than it seems, especially if there is a large number of assets or multiple beneficiaries involved.  As an Arizona based law firm, JacksonWhite’s estate planning team offers a wide array of estate planning services, including help prepare POD and TOD accounts.

We have been helping Arizona families prepare their estates for over 30 years, to get in touch either give us a call or fill out a form online.

 

Call Arizona Estate Attorney Dave Weed at (480)467-4325 to discuss your case today.

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