What Is a Transfer on Death (TOD) Account?

A Transfer on Death (TOD) account allows assets to pass directly to designated beneficiaries upon the account holder’s death, bypassing the probate process. This simplifies estate planning by ensuring a quicker, streamlined distribution of financial assets like investment portfolios and bank accounts.

Core Functionality of Transfer on Death Accounts

A Transfer on Death (TOD) account allows assets to pass directly to named beneficiaries upon the account holder’s death, avoiding the probate process. This means assets can be distributed more quickly and privately, as probate records are public. The account holder maintains complete control over the assets during their lifetime, including managing investments, making withdrawals, and changing beneficiaries. Beneficiaries have no access or rights to the assets until the owner’s death.

Many common types of financial assets can be designated as TOD, including brokerage accounts holding stocks, bonds, and mutual funds. Bank accounts and certain certificates of deposit (CDs) can also be set up with a similar designation. Some states even allow real estate and vehicles to carry a TOD designation, enabling their direct transfer to beneficiaries. The eligibility of specific assets for a TOD designation can vary depending on the financial institution and state regulations.

While both transfer assets outside of probate, TOD and Payable on Death (POD) accounts differ in application. TOD typically applies to securities and investment accounts, like brokerage accounts. POD generally pertains to bank-related assets, including checking accounts, savings accounts, and certificates of deposit. Both designations bypass probate for the specified accounts.

Establishing and Managing Your TOD Account

Establishing a Transfer on Death account is straightforward. Begin by contacting your financial institution, as most brokerage firms and banks offer TOD designations. You will need to complete a beneficiary designation form, which specifies who will inherit your assets.

When designating beneficiaries, provide their full legal names and identifying information. You can name multiple beneficiaries and specify the proportion each receives. Designating both primary and contingent beneficiaries is important. Primary beneficiaries are first in line, while contingent beneficiaries inherit if primary beneficiaries cannot, such as by predeceasing the account holder.

For multiple beneficiaries, you might consider options like “per stirpes” or “per capita.” A “per stirpes” designation means that if a named beneficiary predeceases you, their share passes to their descendants, ensuring a generational distribution. In contrast, “per capita” ensures that if a beneficiary predeceases you, their share is divided equally among the remaining named beneficiaries. If a minor is named as a beneficiary, a court-appointed custodian may be necessary to manage the assets until the child reaches adulthood.

An existing account can be converted to a TOD account by completing the required forms from your financial institution. These forms are then submitted, and the institution will process and confirm the designation.

Regularly review and update your beneficiary designations. Life events like marriage, divorce, birth of a child, or a beneficiary’s death warrant a review. Updating your TOD account ensures assets are distributed according to your current wishes and prevents unintended outcomes. You can modify or revoke a TOD designation at any time, reflecting life changes.

Taxation and Other Key Aspects

Assets transferred through a TOD account generally receive a “stepped-up basis” for income tax purposes. This means the cost basis of the inherited assets is reset to their fair market value on the date of the original owner’s death. For beneficiaries, this can significantly reduce potential capital gains taxes if they later sell the inherited assets, as capital gains are calculated only from this new, higher value. For instance, if stock bought for $10 is worth $75 at death, the beneficiary’s basis becomes $75, minimizing taxable gain upon sale.

While TOD accounts avoid probate, they do not exempt assets from federal estate tax. Assets held in a TOD account are included in the deceased’s taxable estate. The federal estate tax exemption is substantial, currently $13.61 million per individual for 2024, affecting a small percentage of estates. Some states may also impose their own estate or inheritance taxes.

A TOD designation becomes effective only upon the account holder’s death. The account owner retains full control and ownership of the assets during their lifetime, including the ability to change or revoke the designation at any time. The designated beneficiary has no rights or access to the funds until the owner passes away.

Beneficiary designations for TOD accounts generally supersede instructions in a will for the specific assets they cover. If a will directs an asset to one person but a TOD designation names another, the TOD designation typically takes precedence. Ensure TOD designations align with your overall estate plan to avoid unintended distribution.