Transfer on death accounts can avoid some assets from going through probate. However, it is important to know that the laws governing TODs vary from state to state, according to Yahoo! Finance in “Transfer on Death (TOD) Accounts for Estate Planning.”
Here’s how it works:
A TOD account automatically transfers the assets to a named beneficiary when the account holder dies. Let’s say you have a savings account with $100,000 in it. Your son is the beneficiary for the TOD account. When you die, the account’s assets transfer to him.
A more formal definition: a TOD is a provision of an account that allows the assets to pass directly to an intended beneficiary, the equivalent of a beneficiary designation. Note that the laws that govern estate planning vary from state to state, but most banks, investment accounts and even real estate deeds can become TOD accounts. If you own part of a TOD property, only your ownership share transfers.
TOD account holders can name multiple beneficiaries and split up assets any way they wish. You can open a TOD account to be split between two children, for instance, and they’ll each receive 50% of the holdings, when you pass.
One thing to bear in mind: the beneficiaries have no right or access to the TOD account while the owner is living. The beneficiaries can change at any time, as long as the TOD account owner is mentally competent. Just as assets in a will can’t be accessed by heirs until you die, beneficiaries on a TOD account have no rights or access to a TOD account until the original owner dies.
Simplicity is one reason why people like to use the TOD account. When you have a properly prepared will and estate plan, the process is far easier for your family members and beneficiaries. The will includes an executor, who is the person who takes care of distributing your assets, and a guardian to take care of any minor children. Absent a will, the probate court will determine who the next of kin is and distribute your property according to the laws of your state.
A TOD account usually requires only that a death certificate be sent to an agent at the account’s bank or brokerage house. The account is then re-registered in the beneficiary’s name.
Whatever is in your will does not impact the TOD account. If your will instructs your executor to give all of your money to your sister, but the TOD account names your brother as a beneficiary, money in the TOD account is going to your brother. Your sister will get any other assets.
An estate planning attorney can advise you on creating an estate plan that fits your specific circumstances and may include TOD accounts.
Reference: Yahoo! Finance (June 26, 2019) “Transfer on Death (TOD) Accounts for Estate Planning”