As a property owner, you may be thinking of leaving your estate to various beneficiaries when you finally depart this world, and understandably so. There are multiple ways to do so in California. A living trust is an excellent option, although it typically requires the assistance of an attorney and a substantial amount of paperwork. Other options include a will and a power of attorney. But these, too, may be involved.
If you are not yet ready to deal with the paperwork of a living trust, write a will, or even obtain a power of attorney document, you may want to consider yet another option, which is much simpler—a transfer on death (TOD) account. This blog explores how TOD accounts work, including who the beneficiaries of these accounts can be.
What Are TOD Accounts
A TOD is an account that permits the owner to select beneficiaries who will inherit the account’s property after the owner’s demise. That means if you own one or more savings accounts that qualify as TOD, you can use the beneficiary part of the account's or accounts' information and designate an individual to take possession of the assets once you die.
TOD accounts are generally used for properties in brokerage accounts. Examples of these properties are mutual funds, bonds, and stocks. They can also be used for investment properties and insurance policies. Banks have a similar tool, called a POD (payable on death) designation, which could be utilized for certificates of deposit and cash. You can think of POD designations as TOD designations on bank accounts. Additionally, certain forms of real estate permit TOD accounts, allowing for the easy transfer of property ownership upon death.
Not all states allow TOD accounts. States that permit this designation include the following:
- Arizona
- Arkansas
- Alaska
- District of Columbia
- California
- Hawaii
- Colorado
- Kansas
- Indiana
- Illinois
- Minnesota
- Mississippi
- Maine
- Missouri
- Nebraska
- Montana
- North Dakota
- New Mexico
- Ohio
- Nevada
- South Dakota
- Oregon
- Oklahoma
- Texas
- Utah
- Washington
- Virginia
- Wisconsin
- West Virginia
- Wyoming
If the state you live in allows an individual transfer on death account (California does), you can have trusts, TOD accounts, and wills all at the same time for purposes of ensuring comprehensive estate planning. However, it is crucial to understand that just like beneficiary designations on, for example, retirement accounts, TOD designations also override wills. If you have a will and a TOD account in place simultaneously, it is essential to ensure the TOD account is consistent with your current wishes. That is because the TOD account will determine who the property will go to upon your demise.
Naming of TOD Account Beneficiaries
You can designate any organization or person as a beneficiary of your transfer-on-death account. If your legacy goals are numerous and you wish to leave some accounts to your heirs and others to, for example, charities, TOD accounts allow you to achieve this.
However, it is crucial to remember that it is generally not wise to designate minors as beneficiaries to your TOD investment accounts. Since a minor cannot control an investment account, another grown-up would have to be selected to manage it for the benefit of the minor. In that case, consider establishing a living trust or a Uniform Transfers to Minors Act (UTMA), which in California is known as a CUTMA (California Uniform Transfers to Minors Act).
How To Create a TOD Account
Designating your accounts or other properties as a TOD account is a simple process. The following are the steps to take:
Determine Eligibility.
The first step in creating a TOD account is to verify eligibility. One of the factors you will be checking when determining eligibility is whether your state allows these accounts (we have listed the qualifying states above). Another means to determine whether your state permits these accounts is by asking your bank or other financial institution. They will probably have forms that clients can use to add beneficiaries to their TOD accounts.
Verify whether or not your state supports transfer-on-death designations for all types of accounts. Some states impose restrictions or mandate specific registration. For example, if it is real estate, some states require a TOD deed.
Also, remember that TOD accounts are usually available for financial accounts like savings accounts, individual retirement accounts (IRAs), brokerage accounts, and even particular kinds of real estate (based on the specific state).
Designate Beneficiaries
The second step is to decide whom you wish to choose as your beneficiary or beneficiaries. Some accounts permit more than one beneficiary, with given percentages allocated to each.
Contacting Your Financial Institution
Contact the credit union, brokerage firm, or bank where you have the account. Ask for the relevant forms. After your financial institution provides you with those forms, complete them, listing all beneficiaries you have chosen, including the percentage you would wish them to have.
If required, you will also have to notarize the paperwork and include witnesses. You must fill out distinct forms for every TOD account. In California, for example, financial institutions require that all forms be notarized and signed by two witnesses.
Update Beneficiary Details
Regularly review beneficiary designations and update details, especially after significant life events, such as divorce.
The Rights of TOD Account Beneficiaries and Owners
As the owner, you retain complete control of your TOD account until your death. Beneficiaries to the account do not have any rights to the properties until after your death. Consequently, a TOD is an excellent tool if you would like to maintain 100% authority over your assets while you are alive. This also means you can withdraw funds from your TOD account at whatever time and without restrictions.
Since you will maintain complete control of your assets while you are alive, you can change your beneficiaries whenever you want. You can do this by signing another transfer-on-death beneficiary form. Like other beneficiary designations, ensure you review your beneficiary designations whenever you review your estate planning paperwork and when you have significant life changes, like marriage.
What Happens Once You Die?
After you die, your financial institution temporarily freezes the property or funds in your TOD account from trading until they are re-titled into the name of the beneficiary. If you have named only one beneficiary, the assets may remain in the same account; only the account's name will be changed. However, if you had named multiple beneficiaries, the financial institution will open new accounts for each beneficiary. Then, it will divide the assets depending on the allocated percentage and transfer them into the newly created accounts.
TOD Accounts’ Tax Implications
From the perspective of estate tax, transfers on death accounts are part of your estate upon demise. And since your TOD account is part of your estate, it means the assets may be taxed based on the size of your estate and the exemption value for estate taxes at the time of your demise.
As of 2025, the federal exemption value for estate taxes is $13.99 million for an individual. For a married couple, it is $27.98 million. Amounts beyond this threshold face a 40 percent federal estate tax. Additionally, based on the specific state you reside in at the time of your demise, the assets may also face estate taxation.
If you have a sizable estate and wish to lower estate taxation, consider exploring estate tax planning tools that exploit yearly gifting or particular trusts to eliminate or reduce estate taxation.
When thinking about capital gains tax, it is helpful to understand that property held in TOD accounts typically receives a step-up in basis. That means the property’s cost basis “steps up,” becoming equivalent to the fair market value on the date of your death. Based on your concerns about reducing taxes for your beneficiaries, this could assist you in general tax planning. It could also help you decide what assets to place into your transfer-on-death account, which property to place into a trust, and which assets to give out as gifts.
What If You Are Bankrupt?
A transfer-on-death account will not safeguard assets from lenders during your lifetime. Since you maintain complete control of the property or funds during your life, it means your bankruptcy trustee can access those assets and pay lenders as part of the bankruptcy estate.
If you pass away while still bankrupt, the property or funds in your TOD accounts will first be utilized to clear outstanding debts before your beneficiaries receive anything. TOD accounts help prevent probate, but they do not override creditors’ claims.
On the other hand, the timing of your demise is essential if your beneficiary has declared bankruptcy. If you die during or before your beneficiary declares bankruptcy, the assets are generally deemed to belong to the beneficiary. Thus, they become part of their bankruptcy estate, accessible to pay lenders.
If you die within six months of the beneficiary declaring bankruptcy, the assets are deemed property of the bankruptcy estate. Thus, they must be given to the bankruptcy trustee. Some bankruptcy courts have categorically stated that finances received through a POD account within the six months are not deemed an inheritance; therefore, they should be excluded from the bankruptcy estate. However, this is a complicated area, and opinions might vary from one jurisdiction to another.
If you die more than six months after the beneficiary declares bankruptcy, the assets generally do not become part of the bankruptcy estate. The beneficiary can therefore keep the property.
Advantages of Creating a Transfer on Death Account
Transfer-on-death accounts offer many benefits. The primary advantages include that the accounts enable beneficiaries to avoid probate. The accounts are also cost-effective and easy to establish, and they typically transfer properties to beneficiaries faster.
Avoiding Probate
Among the most significant advantages of transfer-on-death accounts is that the property does not need to be subject to lengthy probate hearings. Designating beneficiaries is sufficient to move the properties to the selected beneficiaries after the correct paperwork is submitted to the deceased’s final institution. Since assets in TOD accounts are not subject to probate hearings, during which the deceased's assets become a public record, these accounts also offer the advantage of privacy.
Easy to Create
Transfer-on-death accounts are straightforward to create. The specific financial institution generally provides the beneficiary designation forms. TOD account forms must typically be notarized after they have been signed and completed.
Flexibility in the Course of the Owner's Lifetime
TOD account owners retain complete control of their assets as long as they are still alive. They can remove or change beneficiaries at any time without obtaining consent from the beneficiaries.
Cost-Effective Tool of Estate Planning
Establishing a transfer-on-death account generally incurs minimal cost. This fact makes this option more affordable than forming a trust. Thus, it could be especially beneficial for persons with smaller estates.
Easy to Transfer Assets
When the TOD account owner passes away, the retitling of the properties to the beneficiaries is relatively easy. The specific financial institution simply requests a copy of the death certificate of the account owner. Some institutions also request the affidavit of domicile. This document confirms the deceased individual’s residency at the time of their passing. With this documentation in hand, financial institutions then change the account's name to the selected beneficiary or set up other accounts if the deceased named multiple beneficiaries.
However, there are cases where clients must consider alternative estate planning options—either in addition to or instead of a transfer-on-death account.
The Disadvantages of Transfer on Death Accounts
Unlike other estate planning tools, such as living trusts, transfer-on-death accounts lack certain features that may be essential to particular clients. These features include flexibility in deciding how beneficiaries must receive the property, implications on estate tax, and creditor protection.
Assets Subject to Estate Taxes
Any assets in transfer-on-death accounts are included under the taxable estate of the account's owner. As outlined above, this means these properties may make the estate taxable. If you have an estate above the present federal estate tax exemption value (or beyond any state estate tax exemption value if applicable), it might be wise to consider establishing a transfer-on-death account solely after you have explored other options of estate tax planning to assist in eliminating or minimizing estate taxes.
No Flexibility
Unlike trusts, you cannot dictate what your beneficiary can or cannot do after they receive the assets they have inherited, or when and how they will distribute them. If you do not have an issue leaving your assets to your beneficiaries outright upon your passing (with no strings or stipulations attached), a transfer-on-death account might be a great option. However, if you want to leave guidelines or conditions about how the beneficiaries should use the assets, other estate planning strategies, such as trusts, might be an ideal option.
For example, suppose you have a child who is a spendthrift, or you wish to leave your property to your grandchild for educational or medical purposes. In this case, establishing any type of trust will provide more flexibility when it comes to choosing how and when the beneficiary may access the finances.
Or if you have a grown-up special needs child as the beneficiary, establishing a special needs trust permits you to designate a trustee of your choice to distribute and manage the properties on their behalf in a manner that will not disrupt any government-related benefits they might be currently receiving.
No Lender Protection
Properties in transfer-on-death accounts are not safeguarded from lenders, unlike those in most retirement accounts or trusts.
Possibility for Unintended Repercussions
Life events, including estrangement or divorce, can render TOD designations outdated. If you forget to review and update your beneficiaries, your assets may go to unintended recipients.
Unsuitable for Children
If the designated TOD account beneficiary is a child, they cannot lawfully manage the assets they inherit until they are adults. This situation typically requires the appointment of a conservator or the creation of a trust, which complicates the process of transferring assets.
Considerations When Setting Up a TOD Account
While transfer-on-death accounts are relatively straightforward, there are factors to note when deciding whether to use them.
- Understanding state laws. Regulations governing transfer-on-death accounts vary from one state to another, especially for real property. Talk to a skilled estate planning lawyer in your state to ensure you have complied with every law.
- Beneficiaries with special needs. Individuals with special needs may lose their government benefits if they become beneficiaries of a TOD account.
- Alternative estate planning strategies, like a special needs trust, could be a great option in this situation.
- Coordination with other estate planning strategies. Ensure your transfer-on-death accounts are in alignment with your general estate plan. This will prevent conflicts or a lack of reconciliation between documents such as trusts and wills.
- Periodic update and review. Regularly review your chosen beneficiaries, particularly after significant life events like divorce, marriage, childbirth, or a beneficiary’s death.
Contact an Experienced Real Estate Planning Lawyer Near Me
It is worth considering setting up TOD accounts and designating your beneficiaries if you have not already done so. TOD accounts are much more convenient than the other tools of estate planning in so many ways. In many cases, it is straightforward to establish your accounts and for the beneficiaries to receive their assets upon your passing.
Still, you might have questions regarding TOD accounts, naming beneficiaries, and other areas. Luckily, you need not mindlessly navigate the process. We at Los Angeles Bankruptcy Attorney can help you thanks to the expert estate planning and bankruptcy attorneys we have. Call us at 424-285-5525 for a complimentary consultation. We can ensure your TOD accounts are in alignment with your general estate plan.
