Talk to families who have lost loved ones close to them and you will likely hear stories about going through probate, an often slow process of distributing and/or resolving an estate.
It is those stories that make Transfer on Death or TOD accounts sound so appealing. A TOD account is a special type of account registration. When the account owner passes away, the assets in the account pass directly to the TOD beneficiary or beneficiaries named by the account owner. This type of account was designed to provide an option to avoid the probate process and transfer the assets directly to the TOD beneficiaries. This direct transfer will indeed take place even if the account owner had a last will and testament or revocable living trust that stated otherwise.
It sounds straightforward, and it may be in other states, but in Pennsylvania, the entire value of a TOD account remains subject to inheritance tax.
Should all liquid assets be registered as TOD accounts, an issue can arise as to whether the estate has enough cash flow to pay the deceased’s bills including Pennsylvania Inheritance Tax. This could produce a scenario where the heirs have to “loan” money back to the estate to pay the bills. If there are multiple heirs, one of them could prove problematic if they refused to pay their share from their TOD account.
There are other potential downsides. TOD accounts may not be appropriate for every family. For instance, they could allow for some recipients that you had intended to benefit from your estate to be disinherited. Should you have a joint TOD account, after one spouse passes away, the surviving spouse will have full control over the account including the ability to change the beneficiaries. For couples in a second marriage with children from previous marriages, the surviving spouse could disinherit the children of the spouse who dies.
There is also the consideration of death taxes. Within the probate process, the estate pays all death taxes. However, if the heirs under the will are different than the beneficiaries of the TOD account, unexpected results could still occur.
Naming beneficiaries on your TOD account and keeping those beneficiaries current is also very important. For example, if the named beneficiary has passed away first and the designation was never updated, the account will indeed be subject to probate.
At One Financial Services, we strive to help you examine all your options when planning your estate. Your One Financial Services advisor is your knowledgeable source to assist you with making these important decisions.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendation for any individual.
This information is not intended to be a substitute for individualized tax or legal advice. Please consult your tax or legal professional regarding your specific situation.