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

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What Is Transfer on Death (TOD)?

The transfer on death (TOD) designation allows an account holder to pass assets from brokerage accounts, stocks, and bonds at their death, bypassing probate. The account holder or security owner specifies the percentage of assets each person receives.

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.

Key Takeaways

• Transfer on death (TOD) designations avoid probate.
• Those named in a TOD don't have access to the assets before the owner's death.
• The TOD designation allows an account holder to pass assets from brokerage accounts, stocks, and bonds.

How Assets Are Transferred

Transfers on Death ensure an investor's securities and security-related assets 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 with percentage allocations.

Retirement accounts such as Individual Retirement Accounts (IRAs) or 401(k)s are not TOD accounts. These have named beneficiaries, with regulations determining when beneficiaries can make withdrawals, how much they can withdraw, or how they are taxed. A TOD transfers all assets associated with an account to the named beneficiary.

Required Documents

Proof of Death: This may be in the form of a death certificate, current court letter of appointment, stock power of attorney, affidavit of domicile, or other documents as proof of death.

Proof of Ownership: Documentation citing the owner and proof of TOD intent. A TOD is used for stocks, bonds, deeds, and similar assets.

Type of Account: 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.

Unlike a TOD, 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

Example

An investor and active day trader has $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 and 50% to their daughter. 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 Happens After the Beneficiary Receives the TOD Assets?

In most cases, a new account is set up for the beneficiary, and the deceased person's securities and funds are transferred. 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.

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?

Assets in TOD accounts are still considered part of the estate. That means creditors can seek to repay debts before beneficiaries can access the assets.

The Bottom Line

A transfer on death, or TOD, is a designation that allows assets to pass directly to a beneficiary after they die. The account owner specifies the percentage of assets each beneficiary receives, allowing their executor to distribute without first passing through probate. TOD cannot be used for retirement accounts like IRAs because retirement account beneficiaries must follow withdrawal and taxation rules.

1. Fidelity. "Retirement Accounts."
2. U.S. Securities and Exchange Commission. "Transfer on Death Registration."
3. Federal Trade Commission. "Debts and Deceased Relatives."

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An annual exclusion is the amount of money that one person may transfer to another as a gift without incurring a gift tax or affecting the unified credit.

A health care power of attorney (HCPOA) is a legal document that allows an individual to empower another to make decisions about their medical care.

A grantor retained annuity trust (GRAT) is a financial instrument used in estate planning to minimize taxes on large financial gifts to family members.

Next of kin is usually defined as a person's closest living relative: it's someone who may have inheritance rights and obligations.

A trust company is a legal entity that acts as fiduciary, agent, or trustee on behalf of a person or business to administer, manage, and transfer assets to beneficiaries.

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