retirement

How Transfer-on-Death Accounts Can Fit Into Your Estate Planning

Also known as joint accounts, these types of accounts let their owners pass on small estates in a simple way.

My wife and I, like most married couples, share a bank account from which either of us can write checks and add or withdraw funds without consent from the other. If my wife outlives me, the account will be hers alone, which my Last Will can’t change.

The account is wholly owned by both of us while we’re both alive, which means that a creditor of mine could make a claim against the entire account without regard for my wife or her interests. In addition, either of us could withdraw all the money in the account and not inform the other. This basic joint account offers a right of survivorship. However, can joint account holders designate who gets the funds after the second person dies?

The answer is yes. Transfer on death (TOD) accounts (also known as Totten trusts, in-trust-for accounts and payable-on-death accounts) allow spouses to pass small estates in a simple, convenient way.

How TOD accounts work

TOD accounts are provided for under state law as part of the account custodian’s contract with the account owner — though both state laws and the terms of a TOD account agreement vary widely. It’s important to take special care if the funds in a TOD account are subject to community property laws as your spouse’s property interest in the account might need to be released if he or she is not the beneficiary.

In some states, this arrangement can permit a TOD beneficiary to receive an auto, a house or even investment accounts. However, retirement accounts, including IRAs, Roth IRAs and employer plans, are not eligible, as they’re controlled by federal laws that outline specific rules for designated beneficiaries.

Beneficiaries of TOD accounts can include persons beyond the surviving spouse, such as children, other relatives and friends, although state law offers special rights that protect the surviving spouse. The spouse of a decedent can legally claim a spousal share of assets, which is usually half. In addition, the spouse must give written consent whenever a TOD account agreement directs account funds to someone in addition to, or other than, the spouse.

You are clearly solely responsible for using TOD accounts and the outcome, whether it is what you intend or not. Most TOD agreements include language that you indemnify the bank from any claims if the account is disallowed, you move to another state, if your beneficiary designations conflict with your estate plan, or you fail to update them.

Transferring control

Following the decedent’s death, taking control of the account can be a fairly simple process — all that might be required is to provide the death certificate and a picture identification to the account custodian. Because TOD accounts are still part of the decedent’s estate (although not the probate estate that the Last Will establishes), they may be subject to income, estate and/or inheritance tax. TOD accounts are also not out of reach for the decedent’s creditors or other relatives.

Some TOD account agreements stipulate that the beneficiary confirm by affidavit that the TOD account owner was free of debt before collecting the money. An agreement may also require that the decedent’s domicile at death was the state in which the TOD account is located. If not, the custodian can allow payment only to the probate estate.

Possible hurdles

Account custodians are often cautious because they may face liability if they pay to the wrong person or don’t offer an opportunity for tax authorities, creditors or the probate court to claim account funds. Some states allow the beneficiary to take over that responsibility by executing an affidavit, at which point the custodian releases the funds and shifts liability to the beneficiary. It’s possible that a custodian can legally refuse to honor a proper beneficiary request for distribution without additional proof or a court order.

The agreement can include terms to place responsibility solely on you and your decedent estate. By placing this language in an agreement, the custodian insulates itself from any costs or liabilities. As owner of a TOD account, you are ultimately responsible for the account’s use and the outcome, whatever it may be.

Obviously, having more than one beneficiary can make claiming the account a more complicated process. Some custodians require equal beneficiary shares. If multiple beneficiaries are named, most TOD agreements allow the account owner to designate a different percentage to each. In the event that one beneficiary predeceases the owner, that person’s share is divided among the remaining named beneficiaries, pro rata. If a TOD account has no beneficiary, it will then pay out to the estate, in which case the decedent’s Last Will takes control.

Working in coordination

If you’re a TOD account owner, you should take care to update your account beneficiaries and ensure that your coordinated Last Will and TOD agreements fulfill your intentions. By being inattentive, a person might accidentally add additional beneficiaries to their Last Will but not update their TOD account. By doing so, the decedent would accidentally disinherit those beneficiaries from full shares in the estate, opening up the possibility of them making a claim against the TOD account in probate court.

On the other hand, if it’s the owner’s intent to exclude some beneficiaries from the TOD account, the Last Will can be written to include a provision allowing the decedent’s TOD agreements to stand separate from the terms of the Last Will. But if that’s your plan, be careful: The decedent estate then likely would become liable for TOD account taxes and any creditor claims, resulting in reduced shares for any estate beneficiaries.

Another thing for TOD joint account owners to consider is that the surviving co-owner has full power to change the account beneficiaries, which means that persons whom the decedent owner may have intended to benefit from the TOD account (and who were purposefully left out of the Last Will) could be excluded.

If the decedent’s Last Will doesn’t rely on TOD account planning, and the account lacks a beneficiary, then state law will dictate distribution of the estate, including that TOD account. In most states, intestacy laws provide for spouses and distant relatives and exclude any other unrelated parties. This means that the TOD account owner’s intent that the account funds would go to specific beneficiaries, or their descendants, would be thwarted.

The TOD agreement will likely include a provision alerting you that the bank has not advised you whether using the TOD account is suitable to your needs, or even legally valid, and directs you to seek advice from your tax or estate planning professionals. You should take that advice.

About the Author

Timothy Barrett, Trust Counsel

Senior Vice President, Argent Trust Company

Timothy Barrett is a senior vice president and trust counsel with Argent Trust Company. Timothy is a graduate of the Louis D. Brandeis School of Law, 2016 Bingham Fellow, a board member of the Metro Louisville Estate Planning Council, and is a member of the Louisville, Kentucky and Indiana Bar Associations, and the University of Kentucky Estate Planning Institute Program Planning Committee.

Most Popular

Is the Stock Market a House of Cards?
investing

Is the Stock Market a House of Cards?

The stock market volatility we’ve been experiencing and the apparent disconnect with the broader economy have some investors wondering just that. But …
October 12, 2020
Stock Market Holidays in 2020
Markets

Stock Market Holidays in 2020

Is the stock market open today? Take a look at which days the NYSE, Nasdaq and bond markets take off in 2020.
October 12, 2020
10 Worst Things to Keep in Your Wallet
Scams

10 Worst Things to Keep in Your Wallet

Storing your passport book or card, a spare key, or any of these other important items in your wallet leaves you open to identity theft -- or worse.
October 9, 2020

Recommended

Once You Create a Living Trust, Don’t Forget to Fund It
estate planning

Once You Create a Living Trust, Don’t Forget to Fund It

Your real estate holdings, life insurance, bank accounts and retirement savings won’t magically flow into your trust. You have to put them there. Fail…
October 26, 2020
States With Scary Death Taxes
inheritance

States With Scary Death Taxes

Federal estate taxes are no longer a problem for all but the extremely wealthy, but several states have their own estates taxes and inheritances taxes…
October 19, 2020
Don’t Let These Too Common Estate Planning Excuses Stand in Your Way
estate planning

Don’t Let These Too Common Estate Planning Excuses Stand in Your Way

The top reasons why people don’t have an estate plan may sound pretty familiar to you. Here’s what they are, and what’s at stake.
October 16, 2020
Considering Early Retirement? 5 Things to Know
Making Your Money Last

Considering Early Retirement? 5 Things to Know

Before you accept a buyout, do the math to see if you really can afford to retire. (We'll show you how.) Then follow up with these tried-and-true stra…
October 15, 2020