Transfer-on-Death

Posted by Nathan Williams

Here's another common question from clients or other advisors: Is it a good idea to have a transfer-on-death designation for assets? This will start to sound like a broken record, but it depends upon the situation.

Transfer-on-death (or TOD or POD), is a way to pass property to designated beneficiaries, without "going through probate" or using a trustee. Within the last several years, Indiana broadened its law to expand the number of assets that can have a TOD designation. It can be an effective and simple way to pass property. It can also cause problems. Here are some general rules of thumb, distilled from our practice and experience, regarding the use of TOD designations:

If it is an “ordinary” family situation, or the plan is to simply leave property in equal shares to adult children, transfer-on-death can be a very effective way to transfer something like an investment account.

If it is an IRA or other qualified asset for income tax purposes, transfer-on-death designation is generally better, but those can be coordinated with a trust if there are other reasons to do so.

If the estate plan is not straight-forward (i.e., you have a second spouse, benefits to a minor, etc.) then you should be very careful with using transfer-on-death. That does not mean you can’t do it. But there can be a number of unintended consequences, so you want to be very careful. But, as an example, one thing that we will regularly do is prepare a “testamentary trust” for couples with minor children, where there is a trust that comes into existence for minor children if something happens to both parents. In that event, we will usually recommend to clients that they make the testamentary trust the secondary beneficiary on life insurance and retirement accounts.