Is a Trust Better Than a Transfer on Death Account?

transfer on death

For many families, estate planning is a balance between avoiding the time and expense of probate and making the most of their money. You might wonder if you need a trust or whether there are less expensive ways to skip the probate process. That could lead you to ask whether a trust is better than a transfer on death account.

How Transfer on Death Accounts Work

A “transfer on death” beneficiary designation can convert a bank or investment account into an estate planning tool. Also called a “payable on death” or POD designation, these forms direct your bank or financial institution to automatically transfer assets in your name to one or more named beneficiaries upon your death. You keep ownership and control of your asset up until your death, then the named person, entity, or trust takes over. Like other forms of beneficiary payments (such as insurance) a transfer on death happens without going through probate, so it can simplify your estate administration and keep some of your assets out of probate court.

Benefits to a Transfer on Death vs Trust

Using a transfer on death bank account to convey your assets to your loved ones can be easier and less expensive than establishing a living trust. Both options avoid probate court, but a transfer on death account is easier to set up. Often you simply need to fill out a form at your bank or financial advisor’s office. For very small estates, where most of the family’s assets are tied up in one central bank account (or set of accounts), a transfer on death designation may be better than setting up a formal trust.

Problems with Payable on Death Bank Accounts

However, more often, the cost of establishing and funding a trust is well worth the expense, since payable on death accounts have problems of their own.

Missing Accounts Create Piecemeal Probate

Each transfer on death designation only applies to one account (or set of accounts) at one bank or financial institution. If you have assets in several places, it may be easy to miss converting one of them into a transfer on death account, or updating the POD designations when circumstances change. Those missing accounts would then still need to go through probate with your personal property and other assets.

No Contingency Plans for Future Changes

You can name more than one beneficiary on a TOD designation, but those people are co-beneficiaries who will each receive a set percentage or amount out of the account upon your death. There are often no alternative recipients, although some types of accounts like life insurance or IRAs may provide this as an option.

This means a transfer on death account often does not have the flexibility needed if something happens to one of those beneficiaries before you pass away. That can sometimes mean the wrong person receives your money. Furthemore, a TOD designation does not prevent a disabled or incapacitated beneficiary from receiving the money, which can necessitate a guardianship for that person to be able to handle the inheritance.

Limited Access to Funds While Incapacitated

A good estate plan covers two things:

  1. How your assets will be distributed when you die
  2. How you will be cared for when you are alive but unable to care for yourself

A transfer on death account only covers the first priority. Because -- as the name implies -- authority over the money doesn’t transfer until you die, your beneficiaries may not have access to the account to pay for things like your nursing home expenses, doctors’ bills, or hospice care once you are incapacitated due to a chronic disease or final illness. The addition of a durable power of attorney or legal guardianship can close this gap, but on its own, a POD designation isn’t enough to make sure your bills get paid.

No Protection from Creditors

Because you still own your transfer on death accounts while you are alive, your creditors can try to collect those assets to pay off your debts. Unlike other asset protection options, a transfer on death account does not shield your beneficiaries from paying those debts. When you pass away and the money transfers to your loved ones, their own creditors may also be able to seize those assets through garnishment in a collections case.

Assets That Cannot Be Transferred on Death

There are some assets that simply cannot be transferred on death. While Florida allows Lady Bird deeds, which transfer real estate the same way as a transfer on death account, these deeds are still disfavored in some ways by title insurance companies. In addition, some limited stock and other types of personal property will not be covered by your POD designations. Those assets will still need to be probated, even after all the transfer on death accounts have passed to their new owners.

Other Cases When a Trust is Better than a Transfer on Death Account

In addition to those problems, which anyone might face, some families have other reasons why a trust is better than a transfer on death account for their estate planning. Transferring your assets, including your bank and investment accounts, into a revocable living trust may be the best choice if:

  • You have minor children you don’t want inheriting large sums of money at a young age
  • One of your beneficiaries receives disability benefits or welfare due to special needs
  • You want to put limits on how your assets are used after you pass away (like setting aside money for grandchildren’s college education)
  • You want to earmark money to pay for the upkeep of a family summer home, pet, or other asset
  • Your heirs don’t get along
  • One of your beneficiaries is bad at handling money or owes substantial debts
  • You own valuable personal property that would otherwise require probate (such as vehicles, jewelry, firearms, or cryptocurrency)
  • Privacy is important to you

Deciding between different estate planning strategies can be complicated. It takes someone with an eye for avoiding future problems and an understanding of how Florida probate law works. Whether a trust or a transfer on death account is right for you will depend on your assets, your needs, and your family relations.

At Harrison Estate Law, we know one size never fits all when it comes to estate planning. We can help you weigh your options, choose your beneficiaries, make decisions about your assets, and execute your chosen estate plan, including drafting and funding a trust. Please contact us online or via email or call 352-559-9828 to schedule a free consultation. If you don’t live close to Gainesville or are practicing social distancing, we are happy to set up a phone or Zoom call.

Categories: Trusts
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