After his wife died Frank, a retiree, updated his Will.  He wanted his estate to pass in equal shares to his three children. Most of Frank’s estate consisted of investments held in a brokerage account.  Unfortunately, Frank, after signing his Will, on the advice of his financial planner, and unbeknownst to his lawyer, designated his investments as “Transferable on Death” (TOD), naming his children as the beneficiaries.  Assets designated TOD are  not part of a decedent estate and therefore do not pass under one’s Will. Consequently, after Frank passed away his Executor didn’t have money to pay costs of maintaining Frank’s home, or for his funeral, or to meet other estate obligations. The Executor had to ask Frank’s children to “loan” the estate part of the TOD distribution they received.  Unfortunately, Frank’s daughter refused to oblige.  His two sons had to step up and advance all the money, causing friction and animosity among the children – a consequence neither Frank nor his money manager wanted or expected. 

Mary, a widow, signed a Will that provided for distribution of her estate to her children.  Her Will directed that the share for her son, Sam, a spendthrift, pass into a support trust to be managed and distributed for Sam’s benefit.  After Mary died the lawyer administering her estate discovered that on the advice of her broker, Mary had designated her investment account, which was a substantial part of her estate, as “Transferable on Death” in equal shares to her children. TOD Assets pass directly to a named beneficiary, not according to one’s Will.  Sam had already received his share of the TOD assets. Consequently, most of his inheritance by-passed the trust set up in Mary’s Will and, as Mary had feared, was ultimately squandered, leaving Sam destitute and a burden on his siblings.

 “Time and again”, observes George Vasiliadis, an attorney with the law firm of Vasiliadis Pappas Associates, “we see carefully-crafted estate plans thwarted by clients who follow the misguided advice of their financial planners to register their securities as “Transferable on Death”.  On the surface, this may seem like a good idea.  Why not, one may ask, avoid tying up assets in probate by allowing them to pass directly to designated beneficiaries?  As illustrated above, this can have some unintended unpleasant consequences.  Here are some reasons why not to register securities as TOD:

LIQUIDITY – CASH TO MEET ESTATE OBLIGATIONS. 

An Executor, upon assuming responsibility, must pay the decedent’s last debts, funeral and burial costs, and continuing financial obligations, for example costs and expenses of maintaining the decedent’s home pending sale or distribution.  These costs are deductible against the Pennsylvania inheritance tax.  An Executor typically makes these expenditures, files the inheritance tax return, and pays the tax on behalf of all the beneficiaries so that they receive their inheritance without further obligation.  Paying the tax early will generate a 5% reduction in the tax.  All of this requires cash – which will not be available if liquid assets fly away via TOD.

COMPLEX FAMILY DYNAMIC.

In families with complicated relationships, TOD accounts can lead to disputes. For example, if beneficiaries are not equally named or if some family members are left out entirely, conflicts may arise. Nor do they allow inheritances to be protected in trust. 

INADEQUATE ESTATE PLANNING FOR LARGE ESTATES

For individuals with substantial assets or complex estates, TOD accounts may not address all planning needs. They do not provide tax advantages or the level of control over asset distribution that a trust might. 

LACK OF CONTINGENCY PLANNING

Though TOD accounts allow for primary beneficiaries, they may not always offer robust options for contingent beneficiaries. If the named beneficiary predeceases the account owner and no alternates are listed, the assets could pass to the wrong persons.

POTENTIAL FOR UNINTENDED CONSEQUENCES

Life events, such as divorce or estrangement, can render a TOD designation outdated. If account owners forget to update beneficiaries, assets might go to unintended recipients.

NOT SUITABLE FOR MINORS

If the named beneficiary of a TOD account is a minor, they cannot legally manage the inherited assets until reaching adulthood. This situation often necessitates the appointment of a conservator or the creation of a trust, complicating the transfer process. A properly-drafted Will anticipates and provides guidance if Minors are beneficiaries.

CREDITORS’ CLAIMS

Beneficiaries of TOD accounts are not shielded from creditors. If the beneficiary has significant debts, creditors may claim the inherited assets to settle outstanding liabilities.

NO TAX BENEFITS

Contrary to what some may believe, TOD assets do not pass free of death taxes, State or Federal.  In fact, the burden on TOD beneficiaries is greater since they must individually arrange for payment of the tax.

ATTORNEY FEES  

Another misconception holds that attorney fees are lower if assets pass via TOD rather than as part of the decedent estate administered by the Executor.  Wrong.  On the contrary, problems that arise because of disruption of an intended estate plan or lack of liquidity create more work for an attorney and greater cost to the estate.  Moreover, as noted earlier, TOD assets often substantially impact an Executor’s responsibilities, for example, preparation and filing of State and Federal death tax returns and State and Federal income tax returns for the estate, and can complicate the tax returns of TOD beneficiaries.

Dionysios Pappas, an attorney with the law firm of Vasiliadis Pappas Associates, cautions “never designate your securities TOD without first seeking the advice of your elder/estate planning attorney”. Contact the lawyers at Vasiliadis Pappas Associates to help you avoid this and other pitfalls in your estate and long-term care planning.

Contact Vasiliadis Pappas Associates for expert guidance on estate and long-term care planning.