Five Reasons a Trust is Better Than a TOD Account

Many people appreciate the convenience of “transfer on death,” or TOD, assets. TOD assets are typically investment accounts, but in Ohio, you can also designate vehicles and real estate to be transferred on death. Sometimes the terms “transfer on death/TOD” and “payable on death/POD” are used interchangeably, but POD designations are usually for bank accounts while TOD designations often apply to stocks, bonds, and other assets.

The process of creating a TOD designation for an asset is generally fairly simple. You consult the institution holding the asset, or where the asset is registered, to obtain a form allowing you to designate a beneficiary to whom the asset will be transferred upon your death. When you die, your chosen beneficiary presents a certified copy of your death certificate to the institution, and the asset is transferred to your beneficiary. With TOD assets, there is no probate involvement, which is why they appeal to so many people.

The relative ease and low cost of establishing a TOD designation may be attractive, along with the fact that you don’t need an attorney to do it. That’s unfortunate, however, because an attorney would be able to alert you to the potential pitfalls of TOD designations, and help you avoid them with another estate planning tool: a living trust. Here are five reasons a trust is better than a TOD account.

Protection in the Event of Your Incapacity

Let’s say you have an investment account containing $300,000. You intend to use the funds in that account during your retirement and designate your adult son as your “transfer on death” beneficiary. You enjoy the assets while you’re alive, and he seamlessly gets them after your death. No problem right?

Hopefully not. But if you were to become legally incapacitated, say, by Alzheimer’s or other dementia, what happens to the funds in your account? If your son needs them to help pay for your care, he may have difficulty gaining access to them. In that case, a TOD designation is useless to you both. However, if the assets were in a trust, they could be used for your care during your life. Your successor trustee (which could be your son) would take over management of the trust on your incapacity. Upon your death, the beneficiaries you named in your trust (which could also include your son) would receive trust assets in accordance with the trust document.

Protection for Minor Beneficiaries

We all know we are going to die someday, but most of us don’t know when. If you name minor children (like your own children or grandchildren) as your beneficiaries on a TOD account, what happens if you die before they reach legal adulthood?

The short answer is: a big legal hassle for your survivors. The first issue is that a proceeding will need to be initiated in the probate court to appoint a guardian to receive and manage the funds while the children are minors.

The second problem is that the moment a beneficiary turns 18, they are entitled to their share of the asset. That could mean hundreds of thousands of dollars in the hands of a teenager. Might they use that money to pay for college? Sure (though it may negatively affect their eligibility for financial aid). But they might also decide to spend it unwisely.

In contrast, if the asset goes into a trust you created, there is no need to appoint a guardian, and the asset can be held until the minor beneficiary reaches an age or milestone (like college graduation or marriage) that you designated.

Protection from Creditors

In addition to protecting your young beneficiaries from themselves, a trust can protect your beneficiaries from creditors at any age. With a TOD account, the only condition necessary for your beneficiary to have a right to the asset is your death.

That means if your beneficiary has a judgment against them, their creditor could potentially seize the asset you intended to benefit a loved one. And if your beneficiary gets divorced after receiving the asset, their estranged part may lay claim to part of it.

If creditor protection is a concern for you, placing an asset in a beneficiary controlled trust will keep it safe for the benefit of your loved ones, and out of reach of their creditors.

Protection in the Event of Unforeseen Circumstances

When you create a TOD designation, you likely imagine the seamlessness of the transfer: with the presentation of a piece of paper, the asset is in the hands of your intended beneficiary. What could go wrong?

Unfortunately, a great deal. What happens if your beneficiary predeceases you? What happens if you have a falling out with the beneficiary, but forget to change the designation? What happens if you have two beneficiaries, and one dies before you?

In all of those scenarios, the assets may end up in hands other than those of the person you would have chosen. With a trust, you can avoid unintended outcomes more easily than with a TOD asset. In addition, if you have multiple assets that you would have designated as “transfer on death,” keeping them in a trust allows you to change beneficiary designations by changing the beneficiaries of the trust. That reduces the likelihood of forgetting to change a beneficiary of one account.

Protection from Family Squabbles

Let’s say you have two children who don’t get along—let’s call them Cain and Abel. They are joint beneficiaries of your TOD account, your primary financial asset. Which is responsible for paying your final expenses? How do you ensure the other reimburses the one who pays for your funeral and final bills? With a TOD account, you can’t.

With a trust, however, your final expenses can be paid out of trust assets, and the remainder, once your debts are settled, distributed equally to your intended beneficiaries.

Trusts do involve more expense and effort at the outset than transfer on death accounts. But that expense should be viewed in the light of an investment in protecting yourself, your family, and the assets you want to leave for them.

If you have more questions about the advantages of trusts over transfer on death accounts, please contact Gudorf Law Group to schedule a consultation.

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