What Is Transfer on Death?
The transfer on death designation lets beneficiaries receive assets at the time of the person's death without going through probate. This designation also lets the account holder or security owner specify the percentage of assets each designated beneficiary receives, which helps the executor distribute the person's assets after death. With TOD registration, the named beneficiaries have no access to or control over a person's assets as long as the person is alive.
- Transfer on death applies to certain assets that have a named beneficiary.
- The beneficiaries (or a spouse) receive the assets without having to go through probate.
- Beneficiaries of the TOD don't have access to the assets prior to the owner's death.
- In order to initiate 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 are aware of the assets they will inherit so they may prepare accordingly ahead of time.
Individual retirement accounts, 401(k)s, and other retirement accounts are TOD. An unmarried person may choose anyone as a beneficiary, but a married person's spouse may have rights to some or all of a retirement account upon death. A surviving spouse has more options for withdrawing money than other beneficiaries do. The named beneficiary may claim the money directly from the account custodian.
The Uniform Transfer on Death Securities Registration Act lets owners name beneficiaries for their stocks, bonds, or brokerage accounts. The process is similar to a payable-on-death bank account. When the account owner registers with a stockbroker or bank, the investor takes ownership. They can then name beneficiaries, and percentage allocations, on the beneficiary form provided by the broker or bank.
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 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 authority 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 his or her financial needs, and follow legal and regulatory obligations.
Example of Transfer on Death (TOD)
A person passes away leaving $50,000 in a bank account and $200,000 in one retirement account.
When setting up these accounts the owner could file a beneficiary form, stipulating who the assets should be transferred to upon death, and in what percentages. The beneficiary form can be updated at any time by the account owner.
If the owner of the account is married, the account will likely transfer to the spouse, even if other beneficiaries are named. Such laws can vary by state, though. If the account owner is not married then the assets will be automatically transferred to the named beneficiaries, assuming all the proper documentation is filed to prove the owner is deceased.
Assume the owner of the account is unmarried. They leave 50% of their bank account to their son (named), and 50% to their daughter (named). Upon death, and after the appropriate paperwork is filed, half of the bank account balance will transfer to the son and the other half to the daughter.
Assume that for the retirement account the owner specified that 30% goes to the son (named), 30% to the daughter (named), and 40% to a named grandchild. Upon death, the percentages are multiplied by the account balance, and that amount is transferred to the respective beneficiaries.