A transfer on death or payable on death account is an account that has a named beneficiary, and the assets are transferred to this beneficiary after the death of the original account holder.
Probate is the legal process of estate administration. If you have a simple will, you would name an executor in the document. The executor would admit the will to probate after your passing, and the court would provide supervision during the administration process.
Transfers to the beneficiary of a transfer on death account or not subject to probate, and this is the primary benefit that they provide.
Types of Transfer on Death Accounts
You can open a transfer on death account at a bank, and you can name more than one beneficiary if you choose to do so.
Years ago, many institutions required account holders to allow for equal distribution to all of the beneficiaries, but this is the longer the case. When you establish the account, you can set the percentages that you want each person to receive.
It is possible for multiple people to create a joint transfer on death account. All of the account holders would have access to the resources, and the assets would be transferred to the beneficiary or beneficiaries when the last account holder dies.
The beneficiary has no access to the resources while the primary account holder is alive, so there are no risks on that level.
Brokerages also offer transfer on death accounts, and when you name a beneficiary on your 401(k), it is essentially a payable on death account. In California, there is a payable on death option for motor vehicles as well.
When A Beneficiary Predeceases the Account Holder
Let’s say that you have four beneficiaries of your transfer on death account. One of the beneficiaries passes away while you are still living. If you make no changes to the account, after your death, the surviving beneficiaries would receive proportionate shares.
If you have one beneficiary and the beneficiary dies before you do, and you do not add another beneficiary, the proceeds would become part of your estate. At that point, the eventual transfer would be subject to the probate process.
Preferable Probate Avoidance Tool
A payable on death account will facilitate probate avoidance, but it is not a substitute for a revocable living trust. If you have this type of trust, you would maintain control of the assets, because you would be the trustee while you are alive.
You name a trustee to succeed you in the trust declaration, and your heirs would be the beneficiaries. Along the way, you can add additional property to the trust, you can remove property, and you can amend the terms.
After your passing, the trustee would distribute assets to the beneficiaries outside of probate, but there are other benefits. You can include a spendthrift clause, and the principal would be protected from the beneficiaries’ creditors after your death.
The distribution terms would be set when you establish the trust. If you do not want to provide lump sum inheritances all at once, you are not required to do so. You could provide limited distributions over time to prolong the usefulness of the trust.
You can account for incapacity when you have a living trust, and this is a key advantage, because many elders become unable to handle their own affairs eventually. When you establish the trust, you can name a disability trustee to assume the role if it ever becomes necessary.
Ownership of all or most of the assets will be consolidated, and this simplifies the estate administration process for the trustee. To account for assets that were never conveyed into the trust, you can include a pour-over will. This will facilitate the transfer of the assets into the trust.
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