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Transfer on Death Accounts

Transfer on Death Accounts

Transfer on Death accounts can be a simple and effective way to pass on financial assets to a beneficiary at the time of your death. While their simplicity may be one benefit and this may be a good tool for smaller estates, however, there are disadvantages that the simplicity may also bring. Depending on your purpose. it is important to determine if a TOD account is the right tool for transferring funds for you, especially as problems may come up unexpectedly when circumstances in life take a change.

Difference Between Transfer on Death and Payable on Death Accounts.

Payable on Death accounts are very similar to Transfer on Death accounts but are often used when referring to the transfer of funds from a bank account or credit union upon a person’s death.  Transfer on Death accounts are the transfer of assets including stocks and bonds and are used more often when dealing with financial advisors and brokerages.


Advantages to having a Transfer on Death Account

Here are a few of the advantages in having a Transfer on Death accounts:


  • Avoids probate and does not need to be included in a Last Will and Testament.

  • Easy to set up - A simple form will assign the account to a beneficiary.

  • Not subject to estate taxes and expenses such as funeral costs and administration fees.


Disadvantages and Considerations to having a Transfer on Death Account

Many of the disadvantages of Transfer on Death accounts stem from the fact that they are simple, straightforward, and do not offer the same options that Revocable Living Trusts does. This severely limits what can be done with the account, and you may find certain situations or wants in your estate where you would like more control over your assets that a Transfer on Death account cannot accommodate.


Here are a few of the disadvantages in having a Transfer on Death accounts:


  • Cannot be controlled by a Last Will and Testament. Each separate Transfer on Death or Payable on Death will need to have its own beneficiary changed if the need arises and these accounts supersede wills and trusts. (a named beneficiary will take precedence over a beneficiary named in a Last Will and Testament or Revocable Living Trust.

  • Possibility of unfair treatment to beneficiaries. If two beneficiaries receive $1,000,000 each, but one through a Transfer on Death and the other beneficiary through a Last Will and Testament, the beneficiary receiving the funds through the Last Will and Testament will receive their share after all the funeral expenses, administrative fees, and estate taxes have been paid; resulting in an unintentional disproportionate distribution.

  • You may want to pay for certain expenses from one Transfer on Death account over another and unwittingly benefit some beneficiaries to the detriment of others.

  • Beneficiaries have no rights to your accounts, which can cause delays or issues if access to these funds are essential but inaccessible.

  • If you become incapacitated and unable to make decisions, funds will be inaccessible to your beneficiaries and they will not be able to use the funds for your care.

  • If a beneficiary predeceases you and you have not named a new beneficiary, the account will default back to probate negating the purpose of setting up the account in the first place.

  • Transfer on Death accounts offer no legal protection of funds. ((i) the change in status of beneficiaries, i.e. divorce or bankruptcy, may put your account at risk; (ii) multiple beneficiaries may be assigned to a Transfer on Death account, all the listed beneficiaries become co-owners of the account as “tenants in common” where all co-owners will have to agree to make any decisions regarding the account. This may cause trouble if one of the beneficiaries is uncooperative or the beneficiaries cannot come to agreements on matters; (iii) disputes between beneficiaries can arise if each person wants to “pick and choose” their preferred assets such as stocks from the Transfer on Death account; and (iv) reporting taxes for a Transfer on Death with multiple beneficiaries can be difficult, as financial institutions typically only issue one 1099 form per account.

  • Payable on Death accounts only allow a single beneficiary to be named and have no option for an alternative beneficiary, and in the event your named beneficiary predeceases you, the funds will have to go through probate court.

The Solution is to Create a Revocable Living Trust

The above disadvantages can be averted by creating a Revocable Living Trust. A more comprehensive solution to a Transfer on Death account, which offers all the same benefits as well as additional benefits without the disadvantages is a Revocable Living Trust. Moreover, a Transfer on Death or Payable on Death account can have a Revocable Living Trust named as its beneficiary. In this way, it is much simpler to change any Payable on Death or Transfer on Death designations by amending the Revocable Living Trust and not each individual account, giving you much more
control over your assets.

For information on how the Marsalese Law Group can provide professional, effective, and efficient legal advice, contact us anytime at 586-915-2184 or

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