TOD Accounts Versus Revocable Trusts – Which Is Better?

Both help you pass down assets while avoiding the time and expense of probate, but one comes with a lot more flexibility than the other.

In recent years the use of TOD (transfer on death) or POD (payable on death) accounts has proliferated, leading many to ask why they should bother working with an attorney to prepare a revocable trust.  After all, why do you need a trust if you can just use payable-on-death or transfer-on-death accounts to avoid the probate process when someone dies?

What is a TOD account or POD account?

A TOD account allows the account holder to name a beneficiary on a non-retirement financial account to receive assets at the time of the account holder’s death, thereby (generally – i.e., when used correctly) avoiding probate.  A TOD account generally handles distributing stocks, brokerage accounts or bonds to the named beneficiary when the account holder dies.

A POD account is similar to a TOD account except that it handles a person’s bank assets (cash), instead of securities.

Both TOD and POD accounts are quick and dirty ways of avoiding probate, which can be slow, expensive, public and possibly messy.  Financial institutions offer TOD and POD at their discretion.  But, almost all major brokerage houses and investment houses now have these types of accounts, as well as most banks for standard bank accounts.  Many even allow you name such a beneficiary easily online.

What is the benefit of using a POD or TOD account?

Probate avoidance. As mentioned, TOD and POD accounts avoid the probate process by naming a beneficiary or beneficiaries to receive the asset directly when the account owner dies.  They distribute assets quickly and (usually) seamlessly to the intended beneficiary when the account owner dies.

What are the pitfalls to using a POD or TOD account?

When someone passes away, there can be creditors, expenses of administering the decedent’s estate, and taxes owed. The person or persons responsible for administering the decedent’s estate are typically empowered under the law to seek contributions from the POD and TOD beneficiaries to pay those debts, expenses, and taxes. If the beneficiaries do not voluntarily contribute, then there may be no choice but to file a lawsuit to obtain the contributions.

In addition to the beneficiary choosing not to contribute, the beneficiary may have spent those assets, have other circumstances, such as involvement in a lawsuit or a divorce, that will complicate turning over those assets, be a minor or otherwise legally incompetent, or be the recipient of government benefits. All of these circumstances will cause complications.

Revocable trusts give you much more than probate avoidance.

A trust allows you to plan for incapacity. If the creator of the trust becomes incapacitated, a successor or co-trustee can take over managing the account for the benefit of the creator.  With a POD or TOD account, a durable power of attorney would be needed to have another person handle the account. Many times, financial institutions can be reluctant to accept powers of attorney, for example, if the documents are old or do not have the appropriate language.

A trust allows you to plan for your beneficiaries. If your beneficiaries are minors, have special needs, have creditor issues, or have mental health or substance abuse issues, trusts can hold and manage assets over a period of time and protect those assets for the beneficiary’s use.  Inheritances can also be managed over long periods of time with a trust. You can also name individuals to receive any remaining assets when the original beneficiary passes.

Revocable trusts hold the assets after the death of the creator of the trust and use those assets to first pay any debts, expenses, or taxes, thereby negating the need to ask for contribution from direct beneficiaries.

While in some cases POD and TOD accounts can be appropriate for probate avoidance, their limitations at addressing other issues can cause many individuals to opt for a revocable trust. Speak with an estate planner to determine what is best for you and your family.

About the Author

Tracy Craig, Fellow, ACTEC, AEP®

Partner and Chair of Trusts and Estates Group, Mirick O'Connell

Estate attorney Tracy Craig is a partner and chair of Mirick O'Connell's Trusts and Estates Group. She focuses on estate planning, estate administration, prenuptial agreements, tax-exempt organizations, guardianships and conservatorships and elder law. Craig is a Fellow of the American College of Trust and Estate Counsel and an AEP®. She has received an AV® Preeminent Peer Review Rating by Martindale-Hubbell, the highest rating available for legal ability and professional ethics.


Emily Parker Beekman

Trusts & Estates Attorney, Mirick O'Connell

Emily Parker Beekman is an associate with the Trusts and Estates Group at Mirick O'Connell.  The focus of her practice is estate planning, estate and trust administration, and tax planning. Emily also specializes in estate planning for disabled persons, guardianship and conservatorship matters, and long-term-care planning and other elder law matters.

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