A transfer on death account is a tool that you can incorporate into your estate plan. Below, we talk about exactly what a transfer on death account is, how it works, and everything else you need to know to plan your estate and protect your family’s future.
Before we look at transfer on death accounts, we should explain what probate is and why people avoid it.
Transfer On Death Account
A transfer on death account is an account that passes on to your beneficiaries and can be established to help your beneficiaries avoid the probate process when you pass away. Read on to find out more about how these important accounts can assist you on your estate planning journey.
If you state your final wishes in a simple will, you would name an executor in the document to act as the administrator. They would admit the will to probate, and the Surrogate’s Court would provide supervision while the estate is being administered.
Creditors are given time to come forward seeking satisfaction, and final debts are paid while the estate is being probated. There is a proving of the will, so the court will examine the document to make sure that it is valid, and anyone that wants to contest the will could make a case.
The executor will identify and inventory the assets that will be distributed to the heirs, and they will be prepared for distribution. This preparation can involve appraisals and liquidation, and it can take time to liquidate property in the optimal manner.
No inheritances are distributed while the estate is being probated, and it will typically take about nine months if the situation is relatively simple and straightforward. Complicated cases can be held up in probate for years.
Probate expenses include the executor’s payment, legal and accounting fees, court costs, appraisal and liquidation charges, and other incidental expenses. The outpouring of money during probate will reduce the value of the estate, and this is another negative.
Most people like to conduct their financial affairs in private, but privacy is lost when an estate passes through probate because the records are available to the public.
Transfer on Death Accounts
You can name a beneficiary when you open up certain types of accounts. This is called a transfer on death or payable on death account. Banks offer these accounts, and you can also add a beneficiary when you open up a brokerage account.
The same would apply to individual retirement accounts, and there are a number of states in the union that allow you to name a beneficiary when you register your car or truck. New York is not one of these states.
After the passing of the primary account holder, the beneficiary or beneficiaries would inherit the assets, and the probate court would not be involved.
A Better Probate Avoidance Solution
If you want to avoid probate while you gain additional benefits, you should consider the utilization of a living trust rather than a transfer on death account. While you are living, you would act as the trustee, so you would have access to and control of the assets.
This would be a revocable trust, so you would be able to change your mind and take back direct personal possession of the property if you ever choose to do so.
You name your heirs as the beneficiaries, and you designate a successor trustee to administer the trust after your death. This can be a family member or friend, and a beneficiary can act as the trustee if this makes sense given your family dynamic.
An alternative would be a professional fiduciary. Trust companies and the trust departments of banks provide trustee services for a fee, and this can be a good choice under some circumstances.
You can include spendthrift protections if you have concerns about the money management capabilities of the beneficiaries. A spendthrift clause would be included, and the beneficiaries would not have access to the principal. This would also apply to their creditors.
The trustee can be instructed to distribute assets on an incremental basis over an extended period of time to prevent ill-advised spending.
There would be no need for probate, so the drawbacks of the process that we have looked at in the first section would not be a factor.
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If you are ready to work with a Manhattan, NY estate planning lawyer to put a plan in place, our doors are open. You can send us a message to set up a consultation appointment, and we can be reached by phone at 212-973-0100.