Estate Planning

Transfer on Death Beneficiary Designations for Financial and Real Property Assets

James R. O’Neill —

Transfer on Death (“TOD”), also known as Payable on Death (“POD”), account registrations are a popular way to avoid the requirement to pass assets through probate upon death and operate as an alternative to retitling assets into a revocable trust during life. Typically used with financial accounts, a TOD account registration designates one or more beneficiaries to receive the assets of the account upon death of the account holder directly from the financial institution without the need for probate or estate administration. Similar to designating beneficiaries for retirement and insurance assets, a TOD account registration is accomplished by completing standard beneficiary designation paperwork with the financial institution. Upon the death of the account holder, the designated beneficiary presents to the financial institution a death certificate and documentation that the state or financial institution may require, and the proceeds generally are distributed reasonably promptly. As with a revocable trust, the TOD registration can be changed or revoked at any time during the account holder’s lifetime.

While this technique for avoiding probate is quite easily accomplished, consideration should be given to the overall estate plan, including post-death liquidity needs for taxes and other expenses of the estate, prior to removing assets from the estate through TOD registrations or other beneficiary designations. While accounts with a TOD registration pass outside of the estate with no probate, the assets in the account are subject to estate taxation and generally are not available to the estate for the payment of taxes or other expenses of administration.[1] If all of the decedent’s assets have designated beneficiaries, the question of payment for funeral and other expenses and remaining tax and other obligations of the decedent either requires cooperation among the beneficiaries or becomes a point of contention and potential litigation.

For example, husband and wife may have joint accounts and include a TOD registration on the accounts with their children as equal beneficiaries. The surviving spouse typically is in a position as designated beneficiary of most, if not all, of the assets to address any estate tax not covered by the marital deduction, as well as outstanding obligations of the deceased spouse and funeral and estate expenses. However, it is important to promptly examine the surviving spouse’s overall estate planning as there will be no marital deduction upon his or her death to cover any estate tax and no assets of the estate to apply to outstanding obligations and funeral and estate expenses if the TOD or other beneficiary designations remain for all of the assets.

There are other considerations to address prior to implementing a TOD registration. TOD registrations generally require the naming of specific individual beneficiaries, not a class or category of individuals. Contingent beneficiaries generally are not permitted to be named and so if the designated individual predeceases, the designated portion of the account typically passes to the decedent’s estate which may result in unintended beneficiaries receiving the account proceeds. Also, some state laws and financial institution procedures only permit the division of an account in equal shares among the designated beneficiaries. Further, TOD registrations eliminate the benefits of many provisions commonly found in testamentary estate planning documents, such as directing proceeds into trusts, rather than outright, and the accompanying creditor protection a trust can provide, as well as providing the fiduciaries with flexibility to address any financial or situational concerns of the beneficiary prior to the beneficiary’s unfettered receipt of the TOD funds.

A similar result to the TOD beneficiary designation may be accomplished with real property in the number of states that have enacted laws authorizing Transfer on Death Deeds. To implement this technique, state law must be consulted and an appropriate Deed prepared in compliance with applicable law and recorded on the applicable land records. In addition to the liquidity and other considerations identified for TOD account registrations, there are additional matters and considerations to contemplate prior to implementing a Transfer on Death Deed. For instance, (i) joint tenancy with right of survivorship ownership of real property supersedes a Transfer on Death Deed; (ii) a Transfer on Death Deed supersedes the terms of a Will providing for a different beneficiary; and (iii) Transfer on Death Deeds give no warranty of title, and retaining or obtaining title insurance may be a problem in some states given the rights of creditors afforded under state law. There may also be additional considerations in states with community property laws. As with a revocable trust and a TOD registration, a Transfer on Death Deed may be amended or revoked at any time during the property owner’s lifetime.

As with all estate planning techniques, TOD account registrations and Transfer on Death Deeds should not be used routinely without consideration of the entire estate plan, with a particular focus on liquidity. Accordingly, before designating a TOD beneficiary or executing a Transfer on Death Deed, an individual should always consult with his or her estate planning counsel to ensure that such registration or deed dovetails with his or her overall estate plan.

[1] However, an individual could include a provision in his or her Will or another instrument directing the fiduciary of his or her estate to seek reimbursement from any beneficiary receiving an asset by TOD registration for the estate tax liabilities attributed to such asset.