Buying and moving into a new home is one of life’s great experiences, especially if you’re buying your first home. From getting that pre-approval to the “yes!” response on an offer to closing and moving in, every step is exciting. And while the process is engaging and fun, it’s important to prepare for moving day […]
Understanding Transfer on Death Accounts
A transfer on death account (TOD) is an investment account that is designed to make the transfer of an account to a designated beneficiary easier. Transfer on death accounts helps those who want to avoid going through probate.
What is Probate?
Probate is a legal process that takes place after a person passes away. It includes:
- Proving in court that the deceased’s will is valid
- Identifying and inventorying the deceased’s property
- Having the property appraised
- Paying debts and taxes
- Distributing the remaining property as the will (or state law, if there’s no will) directs
In general, investment accounts don’t through probate, giving the beneficiaries access to the account. Those who wish to avoid the fees and other hassles associated with probate often utilize transfer on death accounts. To make the process easier, be sure to have a will and speak with your lawyer and financial adviser for advice.
What Accounts are Transferred?
The following accounts and assets can be transferred to a beneficiary upon death:
- Individual retirement accounts
- Other kinds of retirement accounts such as stocks and bonds
It’s important to discuss with potential beneficiaries if they are willing to take on the responsibility of managing an investment or asset. If not, you can place the account in a trust or have a professional management company manage it. Informing beneficiaries ahead of time that they will inherit assets will prevent stress and surprises on their part.
Naming Transfer on Death Beneficiaries
Nearly every state has adopted a law that lets you name someone to inherit your stocks, bonds or retirement accounts without probate. An unmarried person can choose anyone as a beneficiary. On the other hand, a married person’s spouse may have rights to some or all of an account. In addition, a surviving spouse has more opportunities for withdrawing money than other beneficiaries do.
The beneficiary has no rights to any funds as long as you are alive. After your death they can claim the funds without probate. All the beneficiary needs to do is provide proof of death and their identification to the entities holding the assets. Make sure to designate your beneficiary to automatically take over your:
- Bank accounts
- Retirement accounts
- Real estate property