The 4 Pitfalls Of ‘Designated Beneficiaries’ On Transfer On Death Investment Accounts

With an account set up to “transfer on death,” the assets go directly to beneficiaries upon the account owner’s passing. Creating an account this way is beneficial in avoiding the costly and time-consuming process of probate, but it’s important to make sure that the account titling fits with the rest of the estate plan in place.

Titling an account “Transfer on Death” and adding one or two beneficiaries may seem simple and straightforward. Most investment accounts make this easy to set up, and assets can then be transferred rather quickly to a beneficiary. Beneficiaries can also be changed more easily than amending a trust.

However, mistakes or omissions can be made with “transfer on death” account titling as with any beneficiary designations. Here are a few main issues to be aware of when using a Transfer on Death (TOD) account titling.

Life Changes Need to Be Addressed

When life changes take place, make sure to review your beneficiaries. Changes such as marriage, divorce, death of a beneficiary, or other changes that affect your relationship with a beneficiary should be times to revisit your beneficiary designations.  You should make sure you have decided who you want to inherit your IRAs and 401(k), too.

Ignoring Your Overall Estate Plan

Your TOD accounts need to fit together with the rest of your estate plan, and updates for beneficiaries should be kept up to date to avoid conflict or even possible litigation. For example, if you set up a TOD account with equal balances for each of your three children, those accounts may have different balances 20 years later as a result of withdrawal or differences in account performance. In this case, you would probably want to make some adjustments, such as moving money between the accounts to help equalize their balances.

Also, if most of your assets are held TOD, the estate might not have enough money left to pay taxes or maintain the family, so it is important to plan ahead so that this doesn’t happen. On the estate planning side, a TOD account has less flexibility compared to a living trust.

Spousal Rights

If you are considering naming a minor as your beneficiary on your TOD account, it’s important to know that investment firms typically will only release the assets of an account to a minor with a court order naming which adults have the legal authority to make a financial decision on behalf of the minor. The TOD assignment also doesn’t allow for any instruction regarding how the money can be used. Additionally, unlike a trust, you cannot choose to restrict it until a certain age.

Married couples frequently create joint transfer-on-death accounts, which are often titled Joint Tenants with Rights of Survivorship JTWROS. When one spouse dies, the other spouse receives complete control of the account under the right of survivorship. However, this might create issues, especially with blended families or future marriages.

TOD for Elder Care?

As we get older, we may need more help from loved ones, and people often have a Power of Attorney” (POA) to help them make decisions and pay bills. One more thing to keep in mind is that TOD does not give anyone power of attorney.

Every year or two, set a calendar reminder to check your beneficiaries and make sure that your accounts are still set to go to those you wish. It can be common for a child to be forgotten as a beneficiary or for an account to be set up to go to a previous spouse. This can happen easily, especially with accounts set up years or decades ago.

For assistance with your estate plan, contact us at Wilson and Wilson Estate Planning and Elder Law, LLC at 708 482 7090 for our main office in LaGrange, Illinois or at 847 656 8958 for our Northbrook, Illinois office.