When “Transfer On Death” Accounts Go Bad

If you have ever had to deal with a complicated or contested Probate over a family member’s Will, you know that a lot of your problems would have been avoided if funds had instead been held in Transfer On Death [“TOD”] accounts: While Probating a Will requires a lot of court paperwork, time, and the cost of paying an attorney to help navigate through the proceeding, TOD accounts transfer as Operation of Law assets, meaning all the beneficiary of the account has to do is show up with an original death certificate.

But sometimes TOD accounts are not properly set up, cause confusion or secrecy where none was desired, or end up being transferred to people you don’t want them transferred to:

  1. Named Beneficiary Dies: Sometimes a beneficiary on the TOD account predeceases you, and if you mark a box labeled “per stirpes” on the designation you may inadvertently be leaving half of those funds to that person’s other side of the family. I have a client who died with a TOD account naming his daughter as beneficiary and wanted the funds to go to any of his future grandchildren she would have, so he checked the “per stirpes” designation on the form. However, the daughter predeceased him without having any children of her own, and now the funds still go to her estate but get split 50% by his surviving family and 50% with his ex-wife’s family.


  1. A Beneficiary Cannot Be Found: You can (usually) name multiple beneficiaries on a TOD account, and just one of them needs to provide a death certificate to start the transfer process. However, if the address you have for a beneficiary is incorrect, or if the name or Social Security Number of the person is wrong, these funds may end up in limbo. The bank or brokerage company may spend some time looking for the beneficiary, but if they can’t identify them, they may send the funds to a state’s unclaimed funds department. And since the name of the beneficiary isn’t always on the account’s statement you may need an Executor appointed to access the TOD account’s information. Remember, an Executor of your Will has the authority to get any information regarding your financial affairs – including getting information regarding TOD accounts – but the whole idea of having a TOD account is to transfer funds outside of Probate, so you just created the exact problems you had intentionally planned to avoid.


  1. A Beneficiary Has Creditors: One of the down sides of Probate is that you and your beneficiaries’ creditors find out you have died and money is becoming available, so transferring property by a Will effectively informs these creditors that it’s time to collect. However, with a Will, you can protect your beneficiaries from their creditors with certain “Spendthrift” provisions. No so with a TOD account: Unlike life insurance, Wills and Trusts, TOD funds are not protected from a beneficiary’s creditors, so there is no ability to negotiate and the beneficiary’s entire debt may likely have to be paid. And by the way, even though TOD does avoid easy creditor protection (since it is private) that doesn’t mean that a deceased person’s creditors can’t pursue the decedent’s debts transferred by a TOD account.

And these are just the tip of the iceberg, as there are plenty of other issues with TOD accounts that apply to other Operation of Law transfers, such as leaving money to drug addicts, minors, disabled beneficiaries on Medicaid, etc.

In short: Make sure to discuss any TOD account form with your estate attorney before signing it, as there are some aspects to it you may not find favorable. That way your TOD account won’t leave your family SOL.



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