I was speaking with a prospective client recently who asked me the following question:
"Can I Just Use TOD's for All My Accounts and Avoid Probate?"
I am asked the question constantly by clients, prospective clients, and even financial advisors. However, as I explain to everyone who asks, relying on TOD's (the poor man's estate plan) is a foolish endeavor. TOD's (transfer-on-death) is a designation that you can make on nearly every type of financial account (checking account, savings account, investment account, IRA, mutual fund, etc.) that allows the account to pass immediately to a named beneficiary after death. In addition, this type of designation allows the account to transfer outside of probate. Therefore, TOD's are very important planning tools. Although, they do have their drawbacks. The following is a list of how using TODs can backfire and cause more expenses:
- The Beneficiary Named on the TOD Predeceases You
- There Are Not Enough Assets in the Probate Estate to Cover the Claims and Costs of Administration
- Your Will Conflicts with the Beneficiaries Named on Your TODs
- A Creditor Makes a Claim to Bring the TOD Account into the Probate Estate
- The TOD Account is Subject to the Claims of the Estate
In each of the cases named above, the TOD account can be brought into the probate estate because (1) there is no where for the account to go after death, (2) there are insufficient assets in the probate estate to cover the final debts and costs of administration, therefore, the TOD account gets brought into the probate estate, (3) and a disgruntled heir files a claim because the TOD account conflicts with the Last Will and Testament.
However, that's not all! What about your real estate, other real estate interests, cars, and personal effects? These are all probate assests that will have to be administered through the probate administration process.
Therefore, it is imperative not to rely on TOD's as your sole estate planning strategy as relying on TOD's will not always result in the avoidance of probate.
If you have questions about estate planning, or want to discuss setting up your own estate plan, please contact our office to schedule an initial consultation.
Daniel A. Perry
Estate Planning Attorney