Transfer on Death (TOD): What It Is and How the Process Works

What Is Transfer on Death (TOD)?

The transfer on death (TOD) designation lets someone receive assets at the time of their benefactor's death without going through probate. A TOD designation also lets the account holder or security owner specify the percentage of assets each person receives, which helps the executor distribute the person's assets after death.

With a transfer on death registration, the named beneficiaries have no access to or control over a person's assets as long as the person is alive.

A transfer on death designation is generally used for brokerage accounts, stocks, bonds, and other investment types.

Key Takeaways

  • Transfer on death (TOD) applies to certain assets that must be passed on without going through probate.
  • Those named in a TOD don't have access to the assets before the owner's death.
  • To execute a TOD, the brokerage must receive the appropriate documents to verify the assets can be transferred.

Understanding Transfer on Death (TOD)

It is important that beneficiaries of a TOD are aware of the assets they will inherit so they may prepare accordingly ahead of time. Transfers on Death ensure an investor's securities and security-related accounts are passed on to the person or people they want them to be passed to without going through a lengthy probate process.

The Uniform Transfer on Death Securities Registration Act lets owners name beneficiaries for their stocks, bonds, or brokerage accounts. When someone registers with a stockbroker or bank, they are the owner of that account. They can then name beneficiaries and percentage allocations on the beneficiary form provided by the broker or bank.

Individual retirement accounts, 401(k)s, and other retirement accounts are not TOD accounts. These have named beneficiaries, with regulations determining when you can begin making withdrawals, how much you can withdraw, or how they are taxed. A TOD simply transfers all assets associated with an account to the people named.

Transfer on Death (TOD) Process for Brokerage Firms

After receiving notification of an account holder's death, the brokerage firm requests a death certificate, current court letter of appointment, stock power of attorney, affidavit of domicile, or other documents as proof of death. The required documents depend on the type of account, such as a single or joint account, whether one or both account holders are deceased, and whether the account is a trust account and the trustee or grantor is deceased.

Firms may reject documents for the following reasons:

  • If they are not signed in the appropriate capacity, such as by the executor, survivor, or trustee
  • If the forms are completed incorrectly, such as by transposing certificate numbers
  • If the information has been altered
  • If the documents are outdated or missing the necessary court seal

For these reasons, a person must pay close attention when completing and submitting forms.

Transfer on Death New Accounts

In most cases, a new account is set up for the beneficiary, and the deceased person's securities and funds are transferred into it. Typically, no buying, selling, transferring of the account to another firm, or other activities may occur until the account is open and legal ownership has been established.

Opening a new account involves filling out an application and having the beneficiary provide the required personal information. Brokers use the information to learn about the account owner (beneficiary), meet their financial needs, and follow legal and regulatory obligations.

Example of Transfer on Death

Imagine an investor and active day trader with $50,000 in a margin account with their broker and stocks worth $200,000 in their brokerage account. When this investor set up these accounts, they filed a TOD form, stipulating who the assets should be transferred to upon death and in what percentages. The account owner can update this form at any time.

Assume the owner of the account is unmarried with two adult children. They leave 50% of their brokerage account and stocks to their son (named) and 50% to their daughter (named). Upon death, and after the appropriate paperwork is filed, half of the account balance and stocks will transfer to the son and the other half to the daughter.

What Does TOD Stand for?

TOD stands for transfer on death and is a legal means of ensuring specific people receive money and assets like stocks and bonds from brokerage accounts if the account owner dies. This is a straightforward and simple process. It involves filing a form naming the persons or people the account owner wishes to receive the assets. When the owner dies, the assets are transferred upon verification of death and identity.

What Is the Difference Between TOD and Beneficiary?

A transfer on death is an instrument that transfers ownership of specific accounts and assets to someone. A beneficiary is someone that is named to receive something of value.

What's the Difference Between TOD and POD?

A payable on death (POD) designation is an arrangement between a bank and a client that designates beneficiaries to receive assets after the client's death, without going through probate. A POD designation is usually associated with bank accounts and certificates of deposit, while a TOD is used for stocks, bonds, deeds, and similar assets.

Are TOD Accounts Taxable to the Beneficiary?

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

What Are the Disdvantages of a TOD?

One consideration to keep in mind with TOD accounts is that the assets are still considered part of the estate of the deceased. That means that creditors can seek to have debts repaid before beneficiaries have access to the assets.

The Bottom Line

A transfer on death, or TOD, is a designation that allows a creditor's assets to pass directly to their beneficiary after they die. The account owner specifies the percentage of assets each beneficiary is to receive, allowing their executor to distribute the assets without first passing through probate.

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