Terms of a TOD account may vary widely, but the general premise is that the account holder can designate who gets the account at his or her death. This allows the account to pass directly to that designated beneficiary without the probate court’s involvement. In other words, even if the person’s will states that money in that account goes to X, but the beneficiary designation on the TOD account at the financial institution says its to be transferred to Y, then Y gets the money.
To protect the financial institution from unintended consequences, the TOD terms typically include indemnity language stating that you hold the bank harmless should your beneficiary designations conflict with your estate plan or you fail to update them. Periodic review of all beneficiary designations on TOD accounts, retirement accounts, annuities and life insurance policies is always highly encouraged by prudent estate planning attorneys.
While retirement accounts allow for transfer-on-death provisions, you should note that they are not considered TOD accounts which are governed by state law. Retirement accounts are controlled by federal laws that outline special rules for designated beneficiaries. Keep in mind that while you can name any person you like as the beneficiary of any of these types of accounts, Maryland law will protect a spouse through its augmented estate/elective share laws that allow a spouse to inherit a portion of the deceased spouse’s estate. This is to prevent a spouse from effectively disinheriting the other spouse.
Following the account holder’s death, taking control of the TOD account is a very simple process. Producing a photo ID and the death certificate is typically all the financial institution requires. Before spending any of the money, it is important to consult with the estate administrator to ensure that this asset is not subject to creditor liability, income or estate tax. Some financial institutions may require an affidavit indicating that the funds are not subject to creditors or tax liability. If you produce this affidavit, then the liability shifts from the account custodian (financial institution) to the beneficiary.
The account custodians proceed with caution because they face liability if they release the funds to the wrong person or fail to offer the probate estate the opportunity to use the funds towards creditors or other claims. Having more than one beneficiary can complicate matters as well. The TOD agreement typically states the percentage of shares for each named beneficiary. If one named beneficiary predeceases the account holder, that person’s share is divided among the other named beneficiaries, pro rata. If the TOD account does not list any beneficiaries, the funds are paid to the decedent’s estate and become converted to probate property.
For these reasons, it is important for your TOD beneficiary designations and your will to complement one another rather than contradict one another. To ensure all aspects of your estate plan work together cohesively, contact the experienced estate planning attorneys at Stouffer Legal in the Greater Baltimore area. You can schedule an appointment by calling us at (443) 470-3599 or emailing us at office@stoufferlegal.com.
