Banks and brokerage firms frequently advise their customers to set up TOD (transfer on death) accounts. They tell the customer it is a way to avoid probate and make it easy for the beneficiary to redeem the account when the customer dies. Although that may be the case when the customer has a small estate, and the beneficiary is a child, a grandchild or great-grandchild, the creation of a TOD account can create more problems than it solves.
New Jersey, which currently has the worst death tax provisions in the country, also has the most user-friendly probate law. When a person dies, the executor goes to the office of the County Surrogate with the original will and an original death certificate. In some counties the executor can make an appointment in advance. The executor gives the deputy Surrogate information about beneficiaries and next of kin (preferably by sending it in advance). The intake takes only a few minutes. The executor then signs some documents and pays a fee based on the number of pages in the will. In a week or less, the document officially appointing the executor (called Letters Testamentary or Surrogate’s Certificate) will arrive in the mail. Probate is now completed for the most part, as long as there are no contested issues.
Where the estate is more than $675,000.00, or where there are beneficiaries other than a spouse or descendants, the holder of the TOD account will not be able to get his or her inheritance until tax waivers are obtained. So much for TOD being an easy way of handling inheritances.
There are other reasons not to use TOD accounts.
Some years ago, I had a client, Marlene, who told me she wanted a will in which she would leave 12 nieces and nephews the sum of $10,000 each. She then said she had set up 12 TOD certificates of deposit each in the amount of $10,000 - - one for each niece and nephew. The bank officer told her it was an easy way to avoid probate and transfer the money to her beneficiaries. The balance of her estate was an investment account, which she owned jointly with her cousin. Her will would leave the residuary estate to the cousin. During the initial consultation, I learned that Marlene’s income was insufficient to pay her monthly expenses. Her intention was to cash in one CD at a time as she needed money. When I suggested that she change the ownership of the CDs to her name alone, and include a provision in her will leaving each beneficiary $10,000.00, she refused. “Too complicated,” she said.
I then asked her, with tongue in cheek, which of her nieces and nephews she loved the least. She looked at me quizzically. I told her that the gifts to the nieces and nephews would not be affected by the will because the TOD provisions would supersede the will. Therefore, when she cashed in the first CD, the beneficiary would then receive nothing - - there would be no money in the CD, and the bequest in the will would be ineffective because all of her other assets would pass to her cousin. Cashing in a second CD would disinherit a second niece or nephew. Not only that, there was likely to be an estate tax (her estate was more than $675,000) and there would definitely be a 15% tax on each CD still in existence. It was possible there would be problems collecting the tax from the nieces and nephews if they refused to cooperate by allowing the CDs to be cashed in to pay their share of the inheritance tax, all of which might lead to unnecessary attorneys’ fees. She finally saw the light, made plans to change ownership of the CDs as they matured. She died a few years later, and everything went according to her wishes.
Recently, a new client consulted with me and also had TOD accounts for the benefit of friends and nieces, with other assets for her children and grandchildren. She simply could not get past the fact that the bank officer had told her this was the way to go. She left saying she would take my advice, but I could see she was unconvinced. We needed a second meeting a few weeks later because she was troubled that the will would be too complicated. One of the beneficiaries was two years old. Another was sixteen. I asked her whether she was okay with the fact that both of them would receive their inheritances at age 18. “Absolutely not!” she exclaimed. “That is too young. I want their inheritances held until they are twenty-five.” When I explained that, if we changed the title on the two accounts and provided for them to be shared by the intended beneficiaries in the percentages she wanted, and that she could provide for the funds to be held in trust until beneficiaries reached age twenty-five, she saw the light and breathed a sigh of relief.
TOD accounts can be traps for the unwary. Joint accounts set up for the convenience of having someone to pay bills in case of incapacity are also traps that can be solved with a properly-drawn power of attorney. When the person dies, the executor is able to marshal the assets, pay bills and made distribution to the intended beneficiaries in the desired amounts and at the desired times.
Estate planning requires comprehensive thought and should be done under the guidance of an experienced attorney.