There are a variety of different tools that people can use when they’re establishing estate plans. The right strategies can expedite the probate process, optimize what beneficiaries receive and even protect assets from creditors.
Wills and trusts play an important role in the distribution of property after a testator dies. People may also make arrangements for individual resources to directly transfer to beneficiaries. Filing transfer-on-death designations for key resources is one way to keep those assets out of probate court.
An individual with a well-funded retirement account, for example, could arrange for their spouse to receive the account after their passing. Transfer-on-death designations are useful but also create a few potential complications. Those thinking about how to handle financial resources in an estate plan need to understand the pros and cons of utilizing transfer-on-death designations.
What are the benefits?
There are several benefits to using transfer-on-death designations for financial resources. The first is the ability to keep those assets out of probate court. The balance of the account does not count toward the total value of the estate when determining if estate taxes are due. Additionally, the account likely isn’t vulnerable to creditor actions in probate court.
Beneficiaries can also receive access to the funds much more quickly than they might if the account had to pass through probate court first. They simply need to present identification and a copy of the death certificate to the financial institution to assume control over the account.
Transfer-on-death paperwork grants someone control over the account after the current account holder dies without forcing them to share the account while they are still alive.
What are the drawbacks?
There are a few issues with transfer-on-death designations. In some cases, a tragedy could undermine a testator’s intentions. They might die in a car crash that also claims the life of their spouse. There could be probate complications because the beneficiary of the transfer-on-death designation is not alive to claim the account.
There is also the possibility of the testator overlooking the account when they review and update their estate plan later in life. It is relatively easy for people to forget about life insurance policies and financial accounts when modifying a will and other estate planning documents.
A beneficiary designation may become outdated without the testator realizing they need to correct it. There’s also the possibility of the beneficiary forgetting about the account, leading to a scenario where an account remains in legal limbo for months or years.
