Individuals can specify a person as a transfer on death (TOD) beneficiary for retirement or other financial accounts, such as savings accounts. Beneficiaries receive the assets held in the accounts when the owner dies.

Naming beneficiaries helps heirs avoid the sometimes costly process of probate. A TOD beneficiary can be a person, charity, business, or trust. If the beneficiary is a person, they can be a relative, child, spouse, or friend.

Naming a Transfer on Death (TOD) Beneficiary

A TOD beneficiary can be named on individual retirement accounts (IRAs), 401(k)s, and other financial instruments. The Uniform Transfer on Death Securities Registration Act allows owners in most U.S. states to name beneficiaries for their stocks, bonds, or brokerage accounts. Individuals can also open a payable-on-death bank account to distribute cash assets after they pass away and avoid probate. In some states, vehicles and real estate can be transferred by TOD.

A TOD beneficiary can be a relative, child, friend, charity, business, or trust. Married individuals can name a TOD beneficiary, but spousal rules may apply, especially for retirement accounts. A surviving spouse is also commonly afforded additional options for how and when to withdraw money from inherited accounts. Unmarried individuals may choose any beneficiary, but withdrawals may be subject to rules based on the type of account.

Multiple TOD beneficiaries can be named on one account with the percentage of assets specified for each designated beneficiary. This helps the executor distribute assets. Those who designate beneficiaries retain total control over all assets until they die. Named beneficiaries have no access to the assets as long as the account owner is alive.

Why Designate a TOD Beneficiary?

The primary advantage of naming TOD beneficiaries is that the inheritance process is much simpler, faster, and less expensive. The owner has defined who will receive their assets when they pass away. The TOD beneficiary instruction allows heirs to avoid probate and takes precedence over any will that might be in place.

However, naming TOD beneficiaries doesn’t provide much creditor protection, in which case a trust may be a better option. TOD beneficiaries will also be responsible for paying taxes on the money they receive.

A professional financial advisor can guide account holders through the pros and cons of naming TOD beneficiaries as it relates to long-term goals and financial situations.

The Bottom Line

Naming a TOD beneficiary can make the inheritance process simpler because a named beneficiary will automatically receive the assets in the account, bypassing probate. A TOD beneficiary can be family, friends, a business, a trust, or a charity.