Transfer on death and payable on death are two designations used to transfer assets to beneficiaries when an account holder dies without going through probate. Payable on death means that the assets in the account are transferred to the beneficiary. Transfer on death not only transfers the assets to the beneficiary but also ownership of the account. Another effective estate planning tool used to transfer assets between generations without going through probate is a trust.

Transfer on Death

Assets that are transferred upon death avoid the probate process. Ownership of the assets is passed to the beneficiary upon the death of the account holder. The beneficiary (an individual or an organization) has no claim to the account until the owner has passed. Transfer on death designations are revocable, which means that the account owner can change or revoke the beneficiary designation as long as they are alive and capable of making financial decisions.

Transfer on death applies to securities and investment accounts, such as:

• Stocks
• Bonds
• Brokerage accounts
• Individual retirement accounts
• 4019k) accounts

In some states, it is also possible to transfer real estate and vehicles through transfer on death. The asset owner can apply for a certificate of title and name the intended beneficiary.

Transfer on death accounts are easily set up at the financial institution that holds the account. Account holders can name as many beneficiaries as they want, along with the percentage ownership of each beneficiary.

While transfer on death assets avoid the probate process, they are still subject to applicable estate, capital gains, and inheritance taxes.

Unlike irrevocable trusts, transfer on death accounts are still part of the account holder’s estate. This means the assets may be accessed to pay the account holder’s debts before the assets can be passed to the beneficiaries.

Payable on Death

Payable on death bank accounts also avoid the probate process. The account holder can name as many beneficiaries as they want and the percentage ownership for each. Account holders can also make changes when naming their beneficiaries throughout their lifetime. Beneficiaries have no claim to the account before the account holder dies.

Payable on death applies to bank accounts, such as:

• Checking accounts
• Savings accounts
• Certificates of deposit (CDs)
• Money market accounts

Like a joint bank account with rights of survivorship, the assets in a payable on death account are passed to the beneficiary upon the account holder’s death. But, unlike a joint account, the beneficiaries of a payable on death account do not have access to the account until the account holder dies.

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Trusts

Trusts can be revocable, the trustmaker can make changes or cancel the trust in their lifetime, or irrevocable, the trustmaker transfers ownership of the trust assets to the trust and does not typically make changes to the trust.

Your trust can hold a wide range of assets, including real estate, personal property, accounts, business interests, and financial accounts.

Unlike payable or transfer on death accounts, you, as the trustmaker, can provide detailed instructions for how you want the assets in your trust to be used and distributed.

Properly structured trusts allow trustmakers to name successor trustees and offer creditor protection. By designating a successor trustee, trustmakers can name in advance the person or organization they want to take care of their financial affairs in the event they become incapacitated and are unable to make financial decisions for themselves.

It is important to ensure that your payable on death and transfer on death accounts are coordinated with the rest of your estate plan. Your beneficiary designations on your accounts supersede the instructions in your will. If your estate plan is inconsistent, it can result in an unequal or unintended distribution of your assets.

Payable on death, transfer on death, and trusts are all options for avoiding the probate process. Of these, trusts provide the greatest control over your assets. They can offer potential tax savings and creditor protection, options for minor beneficiaries, and flexibility to make changes as your financial goals change.

A wide variety of trusts are available, and your estate planning attorney can help you create a comprehensive estate plan that meets your financial goals and provides for your beneficiaries.

If you have questions about transferring wealth across multiple generations or want to learn about how to protect your assets and property with a comprehensive set of estate planning tools, contact us.