TOD accounts and revocable trusts are valuable tools that you can use to create an effective estate plan. Both of these financial accounts avoid can probate, if not taxes. It’s a good idea to learn about the benefits and limitations of each to know how to best structure your estate plan.
What is a TOD account?
Transfer-on-death accounts transfer assets to the beneficiary when you die. It’s similar to a trust but not the same. There isn’t a trustee who manages the account with a TOD. You could deposit stocks, bonds and brokerage accounts into a TOD. A type of financial account that you can’t add to it is a retirement account. If you want to pass on cash via transfer-on-death, you might want to set up a payable-on-death account. TOD accounts are for securities. You could open a transfer-on-death account at a bank, brokerage or investment company.
A drawback of this type of account is creditors of the decedent could recover debts from the account. Other responsibilities that your family might need to handle by tapping into the TOD are taxes and estate administration expenses. It’s a good idea to take these issues into consideration while estate planning.
Circumstances of the beneficiary could affect the TOD account too. Examples of these scenarios are divorce, lawsuits and legal incompetence. Minors and those who are receiving government benefits may not be able to receive the TOD either.
What is a revocable trust?
A revocable trust is a financial account that passes on to a beneficiary when you die but has a trustee in control of it rather than the beneficiary. Because the trust is revocable, you may cancel it or modify it up until your death. Beneficiaries may include minors, those who have special needs, those who have mental illnesses and those who have debts. If you are looking to pass on assets to someone who has special needs, consider choosing a special needs trust. Regular trusts could make them ineligible for government benefits until they use up the trust.
It’s a good idea to weigh the pros and cons of each strategy for passing on your assets to beneficiaries. One strategy may make more sense than another for a particular situation. It is best to consult with an experienced estate planning attorney to go over your options.