Why ITF & TOD Accounts Are (Sometimes) Worse Ways of Transferring Assets than Using a Will

If you read my blogpost dated August 8th, 2015 you saw my argument stating that “In Trust For” and “Transfer on Death” accounts are better ways of transferring your assets than using a will because these transfers are accomplished quickly, free of legal expenses, and are not public information. Transferring assets by probating a will, on the other hand, is not immediate, which assesses court filing fees and legal costs, and makes it a public affair.

But I only told you one side of the story…

There are several instances in which transferring assets by probating your will may be preferable, especially when utilizing a “Testamentary Trust” in your Last Will and Testament. While I can appreciate that the following examples are not “standard” circumstances, they are very common in many families, and should be taken into consideration for yours:

  • A Beneficiary Has Creditor Issues: There are some default creditor protections for beneficiaries under your will, and you can also create a trust in your will that names a trustee who can further protect your beneficiary from these creditors. TOD and ITF accounts automatically transfer funds to your beneficiaries, meaning these funds instead become available assets to their creditors.
  • A Beneficiary Has Spendthrift or Substance Abuse Issues: Again, TOD and ITF accounts make funds immediately available for a beneficiary’s destructive habits. Much like the example above, a trustee named in the will can potentially deny distributions to the beneficiary until that beneficiary cleans up his behavior.
  • Leaving Funds to Minors: Minors cannot own property solely in their name; a substantial transfer to a minor may require that the Guardianship Proceeding be held in a court. While it is possible to have a TOD or ITF account transfer to a Uniform Transfer to Minors Act [“UTMA”] account, these funds become available at age 21, a time when most people do not yet have much financial responsibility. Having those funds held in trust allows for later and more controlled distributions.
  • Leaving Funds to Disabled Beneficiaries: An ITF or TOD transfer may give too much money to a beneficiary that is receiving Medicaid or Supplemental Security Income; because these programs are dependent on the beneficiary having minimal assets, a large influx of money will cause a cessation of benefits. A Supplemental Needs Trust created by the will can make these funds available for the beneficiary’s use, while simultaneously maintaining the benefits of the government program.

Remember that estate planning is based on preserving family assets. The above examples demonstrate how leaving funds using ITF or TOD accounts may defeat your estate planning goals. One size does not fit everyone in the work of wealth transfers.

Q FOR YOU: Do you have any family members whose personal situation could cause your family wealth to be significantly depleted?

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