Can a Transfer on Death (TOD) Designation Help You Avoid Probate?
For many families, probate is one of the most frustrating aspects of settling an estate. It can be time-consuming, expensive, and often delays beneficiaries from receiving the assets they've inherited.
Fortunately, there are several estate planning strategies that may help simplify the process. One of the most commonly overlooked is the use of a Transfer on Death (TOD) or Payable on Death (POD) beneficiary designation.
While these designations can help certain assets bypass probate, they aren't the right solution for everyone. In some situations, they can even create unintended consequences if they're not coordinated with your overall estate plan.
In this article, we'll discuss what Transfer on Death designations are, which assets qualify, their advantages and disadvantages, and whether they can truly help your estate avoid probate.
What Is a Transfer on Death (TOD) Designation?
A Transfer on Death (TOD) designation allows you to name one or more beneficiaries who will automatically inherit certain assets upon your death without those assets passing through probate.
Depending on the financial institution or state, you may also hear these referred to as:
Transfer on Death (TOD)
Payable on Death (POD)
Totten Trust
Unlike adding someone as a joint owner, a TOD designation does not give the beneficiary any ownership rights while you're alive. They simply become entitled to the assets after your death.
Which Assets Can Have a TOD or POD Designation?
Many retirement accounts already allow beneficiary designations, including:
Traditional IRAs
Roth IRAs
401(k) plans
403(b) plans
Annuities
Life insurance policies
TOD or POD designations are commonly used for assets that don't automatically include beneficiary forms, such as:
Bank accounts
Brokerage accounts
Money market accounts
Mutual fund accounts
Individual investment accounts
Some states also allow TOD designations for real estate through Transfer on Death deeds, although availability varies by state.
TOD vs. Joint Ownership
Many people assume adding a child or family member as a joint owner is the easiest way to avoid probate.
However, joint ownership comes with significant risks.
When you add someone as a joint owner:
They generally have full access to the account while you're alive.
They may be able to withdraw the entire balance without your permission.
The account could become exposed to their creditors, lawsuits, divorce proceedings, or bankruptcy.
A TOD designation avoids these issues because the beneficiary has no ownership rights until your death.
Advantages of a Transfer on Death Designation
1. Beneficiaries Cannot Access the Account While You're Alive
One of the biggest advantages is maintaining complete control over your assets during your lifetime.
The beneficiary has no legal ownership interest until after your death.
This provides flexibility while protecting the account from your beneficiary's personal financial issues.
2. Beneficiaries Receive a Step-Up in Cost Basis
One of the most valuable tax benefits of inherited investments is the step-up in basis.
When a beneficiary inherits appreciated investments through a TOD designation, the cost basis is generally adjusted to the market value on the date of the owner's death.
Example
Suppose you purchased shares of a stock for:
Original purchase price: $20,000
At your death, the investment is worth:
$300,000
If your beneficiary inherits the account through a TOD designation, their new cost basis generally becomes $300,000.
If they immediately sell the investment, there may be little or no capital gains tax owed.
This can produce substantial tax savings for heirs.
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3. Assets Transfer Quickly
Unlike probate, which may take months—or even more than a year—to complete, TOD assets often transfer relatively quickly.
Typically, beneficiaries simply provide:
A certified death certificate
Required claim paperwork
Once processed, ownership of the account transfers directly to the beneficiary.
This faster access to funds can be especially helpful when beneficiaries need money to pay immediate expenses.
4. TOD Designations Can Help Avoid Probate
Perhaps the biggest advantage is that TOD assets generally pass directly to the named beneficiary without becoming part of the probate estate.
Avoiding probate may:
Reduce legal costs
Speed up distributions
Maintain greater privacy
Simplify estate administration
However, it's important to understand that this doesn't necessarily eliminate probate for the rest of your estate.
Potential Drawbacks of TOD Designations
Like any estate planning tool, TOD designations aren't perfect.
1. Beneficiaries Receive Immediate Control
For many families, this is exactly what they want.
However, if the beneficiary:
Has spending problems
Has special needs
Receives government assistance
Is financially inexperienced
An outright inheritance may not be appropriate.
In those situations, a trust may provide better long-term protection.
2. TOD Designations Override Your Will
Many people assume their will controls all of their assets.
That's not always true.
Beneficiary designations—including TOD accounts—generally take precedence over instructions contained in your will.
If your will says one thing but your TOD designation says another, the TOD designation usually controls.
This makes regular beneficiary reviews extremely important.
3. Estate Expenses Still Have to Be Paid
One downside of directing many assets outside probate is that someone still needs to pay:
Funeral expenses
Final medical bills
Outstanding debts
Income taxes
Estate administration costs
If nearly every asset transfers directly to beneficiaries, there may be confusion regarding who is responsible for paying these obligations.
Proper estate planning can help avoid these issues.
4. Unequal Inheritances
Imagine you have:
Two children
One IRA
One taxable brokerage account
If you leave one account to each child separately, investment performance may differ dramatically over time.
One child could ultimately receive a significantly larger inheritance than the other, even if your original intent was equal treatment.
Coordinating beneficiary designations with your overall estate plan is essential.
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5. Beneficiaries Can Die Before You
If your designated beneficiary passes away before you do, your TOD designation may become ineffective unless you've named contingent beneficiaries or updated your paperwork.
This is one reason it's important to review beneficiary designations periodically—especially after major life events such as marriages, divorces, births, or deaths.
How Do You Set Up a Transfer on Death Designation?
The process is usually straightforward.
Most financial institutions allow you to:
Complete beneficiary forms online
Submit paper forms
Update beneficiaries at any time
Major brokerage firms often allow TOD designations to be established entirely online.
Unlike creating a trust, establishing a TOD designation generally doesn't require hiring an attorney, making it one of the simplest estate planning tools available.
Can You Use a TOD for Real Estate?
Some states permit Transfer on Death deeds, allowing real estate to transfer directly to beneficiaries without probate.
However, not every state allows this option.
Because state laws vary considerably, it's important to consult an experienced estate planning attorney before relying on a TOD deed as part of your estate plan.
Does a TOD Completely Avoid Probate?
This is one of the most common questions—and the answer is:
It depends.
TOD assets themselves generally avoid probate because ownership transfers directly to the named beneficiary.
However, whether your entire estate avoids probate depends on several factors, including:
Your state's probate laws
Whether you own real estate
Assets titled solely in your name
Estate size
Whether other probate assets remain
Some states have simplified probate procedures for smaller estates, while others require probate regardless of estate size.
For this reason, TOD designations should be viewed as one estate planning tool—not necessarily a complete probate avoidance strategy.
Final Thoughts
Transfer on Death designations can be an excellent way to simplify the transfer of certain assets, reduce probate delays, and provide valuable tax benefits through a step-up in basis.
However, they're not appropriate in every situation.
Before adding TOD beneficiaries to your accounts, consider how they fit into your overall estate plan, particularly if you have multiple beneficiaries, own real estate, have beneficiaries with special needs, or want greater control over how assets are distributed.
Because probate laws vary by state and beneficiary designations can override your will, it's often beneficial to coordinate your financial accounts with an experienced estate planning attorney and your financial advisor.
With thoughtful planning, TOD designations can be a simple yet powerful tool for helping your loved ones settle your estate more efficiently.
As always have a wonderful day,
a better weekend,
and I look forward to writing to you next Friday!
Written by Ryan Morrissey CFP®, CLU®, CHFC®, CMFC
Founder & Principal Advisor of Morrissey Wealth Management
Host of the Retire with Ryan Podcast
Frequently Asked Questions
Does a Transfer on Death designation avoid probate?
Generally, yes. Assets with a valid TOD designation usually transfer directly to the named beneficiary without passing through probate.
Is a TOD better than joint ownership?
In many situations, yes. A TOD allows you to maintain complete control of the asset during your lifetime while avoiding many of the legal and tax issues associated with joint ownership.
Can a TOD override a will?
Yes. Beneficiary designations—including TOD accounts—generally take precedence over instructions contained in your will.