What Are Transfer on Death (TOD) Accounts For Estate Planning?

Transfer on death (TOD) accounts can keep your estate plan intact while keeping your beneficiaries out of court. If you don’t have a will or trust, your family will likely head to probate court to sort out your assets. But even estates with wills likely need to go through probate, which can burden your loved ones and create hostility between family members. A TOD account can avoid a legal mess by moving your assets immediately upon your death, rather than leaving that transfer to the courts.

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What Is a Transfer on Death (TOD) Account?

A transfer on death (TOD) account automatically transfers its assets to a named beneficiary when the holder dies. For example, if you have a savings account with $100,000 in it and name your son as its beneficiary, that account would transfer to him upon your death.

Though laws governing estate planning vary by state, many bank accounts, investment accounts and even deeds are TOD accounts. If you own part of a TOD property, only your ownership share will transfer.

A TOD account can help avoid probate and its associated costs, like executor and attorney’s fees. However, TOD accounts can’t erase your estate’s debt. Creditors can still go after assets in a TOD account. TOD accounts are also subject to inheritance tax and capital gains tax, as well as taxes on withdrawals from pre-tax investments, including IRAs and 401(k) plans.

TOD Account Beneficiaries

Account holders can name multiple beneficiaries and divide assets any way they like. If your TOD investment account is set up to be split evenly between your children, for example, each child will receive an even part of the account when you die.

However, the beneficiaries have no access or rights to a TOD account while its owner is alive. You can also change those beneficiaries at any time, so long as the TOD account holder is mentally competent. Similar to when you leave assets in a will, transfer on death doesn’t establish any rights until after you die. While you remain alive, the named beneficiaries can’t access or control the accounts.

A TOD account also skips the probate process and takes precedence over a will. For instance, if your will states to give all of your money and property to your children, but you have a TOD account naming your brother as the beneficiary, he will receive what’s in that account while your children get everything else.

If you have a property in your will and have a TOD deed on that property, the TOD order may take precedence. The law varies by state, but banks and brokerages in many states will honor a TOD as soon as you die. If you have any doubts about a TOD contradicting your will, you may want to double-check the terms or consult an advisor.

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TOD Accounts vs. Wills

A couple discuss setting up a TOD account.

The most important benefit of a TOD account is simplicity. When a person with a TOD account dies, the executor sends a copy of the death certificate to an agent at the account’s bank or brokerage. That account is then re-registered in the beneficiary’s name.

Compare that to the process without a TOD account, where the probate system can take over the distribution of your assets, naming an executor of your estate and settling your remaining debts. From there, it then distributes whatever is left according to your will, but only if you have one. If you don’t have a will, your assets are distributed evenly by the probate court to whatever living relatives the executor can find.

Pros and Cons of TOD Accounts

When planning for the future, ensuring a smooth and efficient transfer of assets to loved ones is a top priority. Financial tools like TOD accounts provide a way to simplify this process, offering a direct and hassle-free means of passing down wealth. They can help beneficiaries avoid unnecessary delays, legal complexities and additional expenses, making them an appealing choice for many individuals looking to streamline their estate plans.

However, while TOD accounts offer clear advantages, they also come with potential drawbacks. It’s important to consider these carefully before deciding whether to make them part of your estate plan.

Pros of Transfer on Death Accounts

Avoids probate. With a TOD account, assets transfer directly to the named beneficiary without going through the lengthy and costly probate process.
Simple and cost-effective. Setting up a TOD designation is usually free and only requires filling out a simple form provided by the financial institution.
Immediate access for beneficiaries. The designated beneficiary can access the funds quickly, without waiting for court approval.
Maintains owner control The account owner retains full control during their lifetime, including the ability to change or revoke the TOD designation.
Privacy benefits. Unlike probate, which is a public process, TOD accounts remain private.
No Tax consequences at setup. Naming a beneficiary does not trigger taxes, since the transfer only occurs upon death.

Cons of Transfer on Death Accounts

No protection against creditors. If the account holder has outstanding debts, creditors may still claim assets from the TOD account before they reach the beneficiary.
Potential for disputes. If a TOD designation contradicts a will or family expectations, disputes may arise.
Inflexibility for estate planning. TOD accounts do not allow for complex distribution rules, such as staggered payments or trust-like provisions.
Not effective for minors. If the beneficiary is a minor, a court-appointed guardian may be required to manage the funds until the child reaches adulthood.
Multiple beneficiary challenges. Some financial institutions may not allow multiple or contingent beneficiaries, making estate planning more difficult.
Overriding of will iIntentions. Assets in a TOD account pass outside of the will, which may unintentionally disrupt an estate plan.

Ultimately, choosing the right approach for asset distribution depends on individual priorities, financial goals and family dynamics. While some methods offer simplicity and efficiency, they may not always align with complex estate planning needs or long-term financial strategies. Weighing the benefits against the potential risks is essential to making an informed decision that protects both the estate and its intended beneficiaries.

How TOD Accounts Are Used in Estate Planning

Transfer on death accounts are often used to simplify how certain assets pass to heirs. By naming a beneficiary directly on an account, the owner allows those assets to transfer automatically after death, without relying on a will or the probate process. This makes TOD accounts a practical option for people who want a direct way to pass on specific accounts, such as brokerage accounts or savings accounts.

TOD accounts are typically used alongside other estate planning documents rather than as a replacement for them. A will or trust may still be used to address assets that cannot have beneficiaries, outline broader distribution goals or handle more complex family situations. In this way, TOD accounts reduce administrative steps for certain assets while other tools address the remainder of the estate.

Coordination matters when TOD accounts are part of an estate plan. Because TOD designations generally override instructions in a will, inconsistencies can lead to results that differ from the account owner’s intent. Reviewing beneficiary designations of TOD accounts alongside wills and trusts helps keep instructions aligned and reduces confusion for heirs.

TOD accounts also benefit from periodic review. Life events such as marriage, divorce, births or deaths can change priorities and relationships. Updating beneficiary designations allows TOD accounts to reflect current wishes and remain consistent with the rest of an estate plan.

Bottom Line

Filling out paperwork for a TOD account.

Estate planning can be difficult and something that people don’t like to think about. But when your family is grieving, a lack of estate planning can further complicate their lives. If you have someone in your family who you feel can responsibly manage the investments and property you leave behind, a transfer on death (TOD) account can offer a means of transferring portions of your estate while avoiding probate.

Estate Planning Tips

A financial advisor can help you properly plan out your estate. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
If you still have questions about wills and TODs, you may want to consider the strengths and limitations of wills. There are multiple types of wills, and you may find that one addresses your needs better than a TOD. For reference, here are some things to know about making a will.