Divider
Divider

Lewis Schiff
Reina Schlager
To TOD or NOT to TOD?

While Revocable Trusts or TOD/POD registrations can avoid probate, each has special issues. Having the financial advisor and client's attorney work together can provide clients with their best protection in life and at death.

August 20, 2009
by Reina Schlager, CPA, PFS

Most states allow for TOD or POD registration of individually held securities, brokerage accounts and bank accounts, when the custodian allows such registration. TOD and POD are the initials for transfer on death (TOD) and payable on death (POD). Like life insurance, Individual Retirement Accounts (IRAs) and annuities, which all designate specific beneficiaries, a TOD or POD registration enables a specific beneficiary to be identified on accounts for a direct distribution at death and bypasses probate. Before TOD and POD, accounts without a specified beneficiary could bypass probate only if held in joint names or a trust. Otherwise, the asset would be left to go through probate for death disposition.

From the financial advisor's perspective, using TOD or POD — like the direct beneficiary designations in other investments — is another available tool to lower costs at death and speed the distribution process. Many times it takes a simple form or letter of instruction to make this change — with no fee involved. However, it has also become another area that the public may have best intentions, but may inadvertently cause themselves harm.

Here are some cautions and guidelines regarding this topic:

  1. If a revocable living trust exists, before changing the titling of assets from trust to TOD designation, review the change with the client's attorney.
  2. If there are multiple beneficiaries, the TOD on each asset should include all the beneficiaries. If a designation is one beneficiary per account, spending down one of the investments could disinherit a single beneficiary. This may not be your client's intention. Most TODs are not set up for contingent beneficiaries. This is a limitation that prompts the use of titling trust.
  3. If all assets are titled for a direct payout to a beneficiary at death, then what cash or liquidity is there to pay remaining estate bills at death? An executor or personal representative does not want to have to go back to beneficiaries and try to get money back from them to pay bills. Most people do not want to leave their affairs in such complicated disorder and do not intend to leave zero cash for payoff of debts.
  4. If a trust is in place and there is logic for some assets to be titled TOD, a TOD should parallel the trust's distribution. If not, leave additional, non-binding instructions for beneficiaries so it is clear that one instrument was done "intentionally differently." Make your intentions clear. This would be another scenario that would benefit from advice and direction from the client's attorney.
  5. Elective share legislation exists in some states and allows a surviving spouse to "elect" to get a minimum percentage of a spouse's entire estate. In Florida, the elective share is 30 percent. If, through TOD/POD or other direct distributions, less than 30 percent goes to the surviving spouse, the surviving spouse has up to two years to get the full 30 percent share back from the distributed beneficiaries — when money may already be spent. Holding back on distributions may not be as controlled or obvious with direct beneficiary payouts as from a trust situation — which usually involves the assistance and advice of an attorney.
  6. The trust scenario may require subsequent tax returns for the trust (accounting fees) and legal charges for attorney services. The estimated time for final distributions on a trust at death can be immediate or 18 months to 24 months or longer. Early partial distributions from a trust are usually allowed.

A TOD/POD or direct beneficiary designation on any investment, IRA, life insurance, annuity or bank product is usually immediate with the completion of company forms and the submission of a certified copy of a death certificate to the custodian without any legal or accounting fees.

Conclusion

In general, the larger the estate, the less likely that a TOD/POD beneficiary would be appropriate. However, many advisors have clients with total estates in the $2 million and less range and then a TOD/POD for some of the estate holdings, properly positioned, could make perfect sense. Too often, the attorney provides titling instructions, in writing, to the client for their future reference and does not assist in the actual re-titling process. This information may or may not be shared with the financial advisor. Incidental asset accounts may be opened by the client and titled without any guidance. Close collaboration between the attorney and financial advisor on account titling and beneficiary designations will assure the client is best served in life and at death.

Rate this article 5 (excellent) to 1 (poor). Send your responses here.

Reina Schlager, CPA, PFS*, RHU is a Financial Advisor with SCHLAGER SONNTAG & LEVIN (SS&L). SS&L provides tax advice and does not provide legal advice. Securities offered through Cambridge Investment Research, Inc., a Broker/Dealer, Member FINRA/SIPC. Advisory services offered through SS&L, a Registered Investment Advisor. Cambridge and SS&L are not affiliated. Reina is a member of the AICPA's PrimePlus/ElderCare Task Force.

*regulated by the AICPA, not a state or federal agency.
Disclaimer: This is not legal advice. This is information to better prepare your client before they meet with an attorney.