Important Things You Should Know About Transfer On Death and In Trust For Accounts

It has become quite common for clients to list beneficiaries on their brokerage and investments accounts, regardless of whether or not they are retirement accounts. The designation is commonly referred to as a TOD, or transfer on death. With savings, checking and money market accounts held with banks and credit unions, one is also permitted to list beneficiaries, with those usually referred to as “in trust for” accounts.  

Bankers, investment advisors and others actively encourage customers to make these designations.  In some cases they absolutely insist on it and/or they scare their clients into doing so, stating that the probate process is terribly long, expensive, and must be avoided. The reality is that putting beneficiaries on one’s accounts makes it easier for the financial advisors, but it is oftentimes not in the best interests of the client.  The primary advantage of having TOD or “in trust for “ designations on one’s accounts is that it avoids probate, at least with respect to these accounts, although in most instances the probate process is quite simple, quick and relatively inexpensive.  The monies in these accounts pass automatically to the beneficiary, usually just by presentation of a death certificate and identification that one is the beneficiary. Accounts which have beneficiary designations on them supersede the terms of one’s last will and testament or trust, thereby often nullifying one’s wishes.

While having beneficiary designations may be advantageous in some instances, clients must first weigh the pros and cons, rather than just following the advice of others. There may be some adverse consequences of doing so.  For example, with a married couple, having a beneficiary designation may negate the planning they have done in order to avoid estate taxes or long-term care liabilities. Naming a person under the age of 18 as a beneficiary can be disastrous, as a minor is not legally able to accept money unless there is a court-appointed guardian.  Additionally, if you have more than one child, then the beneficiary designation should list all the children, to avoid inequality and fighting.  By using beneficiary designations, you may be inadvertently disinheriting people you intend to provide for, and/or giving more to others than you desire.

If one’s only goal is to avoid probate, there are ways to do so without incurring the risks associated with using beneficiary designations.  Establishing a revocable living trust may be a better option.  Of course, you should first obtain the advice of an attorney experienced in estate planning.

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