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Avoiding Probate on Investments with a TOD

Avoiding Probate on Investments with a TOD

Troy Werner and his family

Written by Troy Werner

Troy Werner has been an indispensable asset to The Werner Law Firm since joining in 2009, providing exceptional legal service to its clients.

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POSTED ON: August 23, 2018

Upon death, a person’s belongings pass through the probate process to clarify and establish the contents of the estate on record and determine who gets what. Without any documents indicating the decedent’s will, the state determines how an estate is distributed as per existing intestate laws. If a will exists, it passes through probate and […]

Upon death, a person’s belongings pass through the probate process to clarify and establish the contents of the estate on record and determine who gets what. Without any documents indicating the decedent’s will, the state determines how an estate is distributed as per existing intestate laws. If a will exists, it passes through probate and is carried out by an appointed executor.

However, the probate process takes its time. Months go by, from waiting for potential creditors to lay to rest any existing liabilities the decedent may have had, to fully ensuring the inheritance process is complete. Probate costs money as well.

For families in the middle of a grieving process, probate can either be a minor nuisance or a major issue. This is compounded by the fact that the larger and more complicated the estate, the longer and more painful the probate process.

However, probate can be avoided – in part, or entirely – through certain estate planning techniques.

Among the many ways to avoid the probate process and simplify inheritance is the TOD registration.

What is a TOD Registration?

TOD stands for “transfer on death” and refers to the ability to designate a beneficiary for certain assets.

This is functionally like payable on death accounts, which allow you to name an account to empty your funds into upon death. TOD and POD registrations avoid probate entirely and can be used for several assets and accounts.

This allows you to essentially remove a large portion of your estate from probate – but it does not remove these accounts from your estate. This means that, for taxation purposes, assets, or accounts with transfer/payable on death designations still count toward the full value of your estate.

This means they are subject to the same estate tax rules as other accounts, and they are still subject to normal income and capital gains taxes while you are alive – the designation does not change who the owner is while you live, and thus, they are included in your estate.

This matters, because while a TOD registration can help you easily bypass probate, it does have its pros and cons in respect to other estate planning tools, such as a more complicated revocable living trust.

Transfer-on-Death in California

The limits of a transfer on death designation are different from state to state.

In California, you can even transfer property through a transfer on death registration, so long as the property is:

  • A single-family home
  • A condominium unit
  • A residence with four or fewer dwelling units
  • A single-family home with 40 acres or less of agricultural property

Other examples of assets and property valid for transfer on death include anything that allows the designation of a beneficiary, including certain non-retirement accounts such as investment accounts, as well as vehicles.

Unlike a payable on death registration which simply pours the funds of an account into a designated account upon death, a transfer on death registration allows a beneficiary to assume ownership and control over an account – which is important to maintaining an accounts potential value, as in the form of an investment account.

Other Ways to Avoid Probate  

It is not necessary for every estate to avoid probate.

But if the hassles and costs of probate outweigh the difficulty of bypassing the process, then it is a simple decision.

The key is in finding the most efficient path towards eliminating the probate process, for an accurate differential.

The best way to avoid probate depends entirely on the size and nature of any given estate.

Given certain factors – such as surviving or deceased spouses, estate value, tax rates and much more – the composition of your estate plan may drastically change.

In addition to transfer on death registrations, which are also known as Totten trusts, there are revocable living trusts, asset protection trusts, spendthrift trusts, and charitable trusts.

Alternatively, you can decide to own your property jointly. In most cases, married couples own their property jointly – but if you are not married, or have separated property acquired before the marriage, you can decide to own a home jointly to seamlessly transfer the property upon death.

Whether these options are ideal for your estate depends entirely on local law, the specifics of your estate, and certain other circumstances, including family details.

Be sure to consult with a professional.

Investment Accounts and Trusts

Investment accounts are typically passed on by naming one or more beneficiaries – but you do have the option of placing the account in a trust, so long as the investment company in question is notified and all the proper paperwork is carried out.

The reason you may want to fund an investment account into a trust rather than designating beneficiaries is to provide more control over how you wish to distribute and divide the account.

Alternatively, with a trust, you can have the account liquidated and paid out to your beneficiaries.

Get It Done Right

Assigning beneficiaries to your assets is a very simple and relatively effortless way to bypass the probate process – but in most cases, assigning beneficiaries is not enough to entirely bypass probate, and in some cases, it may be beneficial from a financial point of view to avoid assigning a beneficiary and to instead fund an account or a piece of property into an appropriate trust.

Making the most of your estate depends entirely on your circumstances and the details of the estate, and only an experienced professional can help ensure that you are making the right decisions.

Avoiding probate entirely is a great idea for larger estates, but even if your estate is smaller and does not need to avoid probate, there are many other reasons to set up a comprehensive estate plan.

From creating a healthcare directive to assigning power of attorney in case of emergencies, estate planning tools are critical to avoiding grief and financial loss in many situations.

Preparing for the worst is important in order to preserve your estate, and more.

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