By Timothy Barrett
Like most married couples, my wife and I share an account that allows either of us to write checks and add or withdraw funds without the other’s consent. If my wife survives me, she will own the entire account and my Last Will can’t change that.
During our lives, the account is deemed to be wholly owned by both of us and, therefore, any of my creditors could make a claim against the entire account without regard for my wife’s interest. Also, either of us could remove all the funds without informing the other. This is a basic joint account with a right of survivorship. But, what if the joint account holders want to designate who gets the funds at the second death?
Originally recognized by a court case (the Matter of Totten, 179 N.Y. 112 (1914)), and often called a Will substitute, Totten Trusts, Trust for Accounts, Payable on Death Accounts and Transfer on Death Accounts (TOD), can make passing small estates between spouses simple and convenient.
TOD accounts are now entirely a product of state law coupled with the account custodian’s contractual agreement with the account owner. State laws and the terms included in a TOD account agreement can vary widely. Special care must be taken if the TOD account funds are subject to community property laws.
Some states replicate this arrangement to allow a TOD beneficiary for an auto, a house, and investment accounts. Retirement accounts, such as IRAs, Roth IRAs and employer plans are excluded from state TOD agreements because such accounts are controlled by an extensive and complicated set of federal laws, including specific designated beneficiary rules.
Because the possible beneficiaries of TOD accounts include persons beyond the surviving spouse, and may include children, other relatives, and friends, state law provides special rights to protect the surviving spouse. The decedent’s spouse has a right to claim a spousal share of assets, usually half. Whenever a TOD account agreement names someone in addition to, or other than, the spouse, to receive account funds, the agreement must include the spouse’s written consent.
TOD accounts and decedent’s estate
After the decedent’s death, claiming the account may be as simple as showing the account custodian the death certificate and a picture identification. But TOD accounts are still part of the decedent’s estate (although not the probate estate established under the Last Will) and may be subject to income, estate and/or inheritance tax, may be reached by the decedent’s creditors, and may be subject to the claims of the decedent’s relatives.
In fact, some TOD account agreements require that the TOD beneficiary sign an affidavit confirming that the TOD account owner did not have any debt prior to collecting the money. The TOD agreement may require that the decedent be domiciled at death in the state where the TOD account is located, or the custodian will allow payment only to the probate estate.
Claiming the account is made more complicated when there is more than one beneficiary. Consider this sample language from typical TOD account agreement: “It is the responsibility of each beneficiary to notify us of the death of the account holder and to provide a completed TOD Beneficiary Plan Distribution Form, a certified copy of the death certificate, and any additional information or documents as we may deem necessary or appropriate in our sole discretion.”
Account custodians are careful because they may be liable for paying to the wrong person or not delaying distribution to give tax authorities, creditors or the probate court an opportunity to claim account funds. In some states, if the beneficiary, executes an affidavit taking over that responsibility, the custodian will release the funds shifting that liability to the beneficiary. The custodian may be within its rights to refuse, without liability, to honor a proper beneficiary request for distribution without additional proof or a court order.
The TOD custodian may include terms in the agreement that protect the custodian from all costs and liabilities and place that responsibility solely on you and your decedent estate, such as: “You acknowledge that we have not advised you about the suitability or validity of this account, and that we recommend that you seek advice from your tax or estate planning professionals prior to signing this agreement and that we have no fiduciary duty to you.”
Responsibility for TOD accounts
You are clearly solely responsible for using TOD accounts and the outcome, whether it is what you intend or not. Here are some terms that are typical in such TOD agreements: “You, your estate or your successors-in-interest will indemnify and hold us harmless from all claims, costs and liabilities, including attorneys’ fees, that may arise out of or relate to opening and maintaining your account, making distributions to beneficiaries, if this account is disallowed for any reason, if you fail to notify us that you no longer live in a state where this account is available, if you make conflicting beneficiary designations from your Last Will, revocable living trust or any other instrument, and for any change of beneficiaries that you may have made for which we have no record.”
Some custodians require that beneficiary shares be equal. However, most TOD agreements will provide that if multiple beneficiaries are named, the TOD account owner can designate a different percentage to each. If one beneficiary predeceases the owner, that share will be divided pro rata among the remaining named beneficiaries. If a TOD account is left without a beneficiary, it will then pay out to the estate and be controlled by the decedent’s Last Will.
Keeping information updated
TOD account owners must take care to update TOD account beneficiaries and ensure that the Last Will and their TOD agreements work together to achieve their full intentions. An inattentive person may accidently add additional beneficiaries in his Last Will but fail to update the TOD account. The decedent thereby accidently disinherits these beneficiaries from a full share in the estate, who may then make a claim against the TOD account in probate court.
If excluding some beneficiaries from the TOD account is the intent, the Last Will might include a provision that the decedent’s TOD agreements shall stand separate from the terms of the Last Will and not be included or consider in the distribution of the decedent’s estate. But, be careful, the decedent estate will then likely be liable for the TOD account taxes, and any creditor claims, thereby reducing the shares to the estate beneficiaries.
TOD joint account owners must also consider that the surviving co-owner can change the TOD account beneficiaries excluding persons the decedent owner may have thought would benefit from the TOD account and therefore were purposefully left out of the Last Will.
If the decedent has no Last Will in reliance on TOD account planning, and the account lacks a beneficiary, then state law controls the estate distribution, including that TOD account. Most state intestacy laws include spousal shares and distant relatives and exclude all unrelated parties. The TOD account owner’s intent that the account funds would go to specific beneficiaries, or their descendants, would be thwarted.