Planning for the orderly disposition of one's assets at the time of death is typically done through a will and possibly establishing a trust or trusts. A will is sometimes called a last testament and is a document that states how a person's assets are to be distributed after their demise. A will can also be used for other instructions and functions, such as naming a guardian for minor children. It's important to note that a will does not take effect until the death of the person who created it (they can change it as long as they are living and mentally competent to do so).
In contrast, a trust takes effect as soon as it is signed and is similar to a will in that it can distribute assets. However, a trust can allocate assets both during the creator's lifetime and after that person's death. What a trust cannot do is determine administrative details like guardians. However, establishing a trust can often avoid probate. In contrast, wills often must proceed through probate court (even if the will specifies the distribution of assets in the hope of preventing the frustrating probate process).
How Is a Transfer on Death Stipulation Different?
Transfer on death (also referred to as payable on death) accounts can save time and trouble for beneficiaries whether there is or isn’t a will. According to caring.com, 57 percent of adults don’t have a will, and fewer people have one today than did last year. While those with more significant wealth may be more likely to create a will or establish a trust to direct the distribution of their estates, even people with modest assets probably would prefer to determine the beneficiaries of their assets.
Transfer on Death Accounts are Commonly Available
For any account with a financial institution (bank, thrift, credit union, or other), you should receive the option to designate a person to whom the money in the account would go at the time of your death. Note that this individual has no right to the funds while you are alive. You can spend it, give it away, close the account, or change the beneficiary. In fact, unless you tell the person about the designation, they would not likely know. But once you die, that person will receive the funds without going through probate, simply by proving your death and their own identification.
How Does Transfer on Death Work With a Joint Account or Community Property?
If you have a joint bank account with a transfer on death beneficiary (other than the joint owner), the funds in that account belong to the joint owner when you die. For example, let's say that Joe and Amy share a bank account and that Sue is the transfer on death beneficiary. If Amy dies, all the money in their joint account belongs to Joe. Joe can leave Sue in place as the beneficiary if he wants, and she would receive any money remaining when he later dies. However, he can also change the beneficiary or spend the money. Sue has no claim on it while Joe is alive.
Is Transfer on Death Available for Other Assets?
In addition to bank accounts, transfer on death options are available for many bonds, mutual funds, and retirement accounts. In many states, you can also designate the disposition of a vehicle and even real estate this way. Individual states maintain separate rules governing eligibility for inclusion and administration.
Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation.