The 4 traps of “designated beneficiaries” on transfer investment accounts at death


When you create an account for “transfer on death”, the assets will go directly to the beneficiaries on the death of the owner. While these assignments can help avoid probate, this account title should always be carefully coordinated with the owner’s overall estate plan, especially for larger accounts and estates.

While the simple title of a “Transfer on Death” account and adding a beneficiary or two may seem like common sense, it’s not always that simple. This type of account can easily be set up on most investment accounts. The main advantage of these types of accounts is that assets can be transferred relatively quickly to a beneficiary, and the costly and fast process of asset probate is avoided. Another advantage is that the beneficiaries can be changed more easily than changing a trust, for example.

As they say, there is no free lunch. Calling a “transfer on death” account will not solve all of your estate planning needs. Likewise, errors or omissions may be made with any designation of beneficiary. Here are some of the issues you should be aware of when using a Death Transfer (TOD) account title.

Life changes must be taken into account

The title of the accounts will not change when your life changes. Marriage, divorce, death of a beneficiary, everything should encourage you to review your beneficiaries. Make sure you decide who you want to inherit from your IRAs and your 401 (k).

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Ignore your comprehensive estate plan

Your TOD accounts should be coordinated with your overall estate plan. The importance of this increases with the size of your net worth. Failure to keep beneficiary updates up to date can lead to conflicts between your heirs and can even lead to litigation. Imagine setting up a TOD account with equal balances for each of your three children (as an example). Well, 20 years go by, and between withdrawal and varying account performance, each of the three accounts has a very different account balance. If this was not your intention, some adjustments to beneficiaries may be necessary. Otherwise, you might want to transfer money between accounts to help even out their balances.

Another problem that arises when most of your assets are held TOD, once the account is transferred to the beneficiary, the estate may not have enough money to pay taxes or support the family etc. There is less flexibility on the estate planning side with a TOD account compared to a living trust.

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Spouse rights

Be careful when naming a minor as the beneficiary of your Transfer on Death account. Typically, investment firms will not turn over the assets of an account to a minor without a court order stating that adults have the legal authority to make a financial decision on behalf of the minor. Also, the TOD assignment does not allow any instruction on how the money is to be used. You also can’t restrict it to a certain age like you can with a trust. What could possibly go wrong by giving an 18-year-old unlimited access to an important inheritance?

It is common for a married couple to create joint transfer accounts on death. (Often called Co-owners with JTWROS rights of survivorship). Keep in mind that when a spouse dies, the other will receive full control of the account under the right of survivorship. This can be a problem with stepfamilies, or marriages, later in life.

TOD for the care of the elderly?

As we age, we may need more help from a loved one. Many seniors have a Power of Attorney (POA) that can help them make decisions and pay bills on their behalf. TOD does not give a proxy to anyone.

Set a calendar reminder to check your beneficiaries annually or every two years. You would be amazed at how many times a child is missed, or your savings are left with your first husband (whom you now hate). There may be reasons for these omissions, or maybe you just never updated your beneficiary on an account that was created decades ago.

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