Transfer-On-Death Accounts: The Complexity of a Simple Plan

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When I was in private practice, I made sure my estate planning clients understood that their Wills only governed the disposition of assets they owned in their sole individual name with no beneficiary designation. Beneficiary designations and property titling are equally important in the planning process, and need to be accurate in order to “weave into” the overall estate plan to produce the intended results. No matter how much care is put into the Will, the estate plan can be easily unraveled with a simple erroneous beneficiary designation or property titling.

What are Transfer-on-death Accounts?

In the last ten years, transfer-on-death (“TOD”) titling on securities and accounts has become increasingly common. TOD accounts are bank or investment accounts which name a beneficiary to receive the account assets upon the account owner’s death. The titling is accomplished simply by naming a beneficiary within the account title, such as “John Smith TOD John Smith, Jr.” With a TOD account, therefore, the account ownership passes immediately to the named beneficiary on the account owner’s death. The TOD titling is fully revocable and revocation doesn’t require consent of the named beneficiary, so the account owner retains full control over the account until death. Compare this lifetime sole control to a joint account: creating a joint account gives the joint owner an immediate interest in the account and access to the funds. Through joint ownership, beneficiary designations and TOD titling, it may be possible to avoid a formal probate estate administration.

Understanding Titling Implications

However, clients should be mindful of possible planning pitfalls related to TOD titling. The terms of the account agreement govern the titling issues. Where the account agreement is silent, New York laws apply. For example, if Jane Smith named her spouse as TOD recipient of her account and thereafter divorces her spouse, the account agreement may require her to affirmatively change the titling if she doesn’t want her former spouse to receive the account at her death. If the account agreement is silent, New York law provides that the TOD titling is automatically revoked upon divorce, and if the account owner still wants the former spouse to receive the account, she must re-affirm the titling after divorce. Similar conflicts may exist between account agreements and state law on what happens if a named TOD recipient predeceases the account owner.

Titling Can Trump Trusts in Wills

If an account owner provided for a spousal trust in his or her Will or trusts for children and/or grandchildren, TOD titling can effectively undo the plan. Because the TOD titling will result in the account passing outside the Will, the trusts under the Will would not receive funding from the account, resulting in unused tax exemptions and young beneficiaries receiving funds outright at age 21. In addition, a TOD titling may be created on a whim to deal with a specific purpose when setting up an account, having a result of deviating from the overall intended estate plan on the owner’s death.

Sourcing Estate Expenses and Liabilities

When considering TOD titling, an account owner should consider what the source of his or her estate expenses and potential tax liabilities will be. If all assets pass by virtue of beneficiary designation and TOD titling, there will be no remaining estate assets to cover funeral and administrative expenses, final bills, legal expenses and tax payments. Creditors can attach the accounts with TOD titling and beneficiary designations and will go after the recipients of the assets for payment, which can create a significant legal mess and be unpleasant and stressful for the recipients.

Revoking Titling Designations

Lastly, it is important to note that TOD designations can be revoked in an account owner’s Will. If an account owner wishes to revoke a TOD title, however, it would be better to change the TOD title on the account rather than to revoke it by Will. Banks and brokerage houses are likely to release funds on a TOD account to the named recipient without knowing that the titling has been revoked by the account owner’s Will. This can result in a potentially awkward situation in which the Executor of the Estate must reclaim the account assets from an individual who thought he was the intended recipient.

How We Can Help

TOD titling requires the same level of thoughtful consideration as a client’s overall estate plan. Clients who are working with an advisor should be sure to discuss all titling and beneficiary designations, and seek advice as to how to best implement them into the plan.

Please contact me or your advisor with any questions you may have regarding Transfer-on-Death account registrations at 941-366-7222 ext. 50608.

This material is provided for general information purposes only and is not a recommendation or solicitation to buy or sell any particular security, product or service. Past performance is not indicative of future investment results. Any investment involves potential risk, including potential loss of capital. Before making any investment decision, please consult your legal, tax and financial advisors. Non-deposit investment products are not bank deposits and are not insured or guaranteed by Canandaigua National Trust Company of Florida, or any federal or state government or agency and are subject to investment risks, including possible loss of principal amount invested.

Posted by Kelly Hohman at 09/02/2014 02:26:35 PM