It has become increasingly common for brokerage accounts and mutual funds to be set up as “Transfer on Death” (“TOD”) accounts.  These are similar to Payable on Death accounts for bank accounts.  Basically, with a TOD account, you name a beneficiary who will receive the account assets at your death.  Brokers have encouraged TOD accounts because the assets pass at death without having to go through probate and they believe that it will reduce probate fees (which is not the case in Connecticut).  In addition, account owners like the simplicity of being able to change the beneficiary at any time without needing to update their Wills.

TOD accounts may cause havoc with estate plans, however, because those accounts do not pass as part of a Will or trust agreement and are not factored into these documents unless your estate planning attorney was made aware of the accounts when the documents were designed.  More often than not, attorneys are not advised of TOD accounts because clients are either unaware or have forgotten that their accounts were set up that way. The following examples demonstrate how a TOD account may cause undesirable consequences which could have been avoided if your attorney was aware of the account (or if the account was not a TOD in the first place):

• You set up a TOD account designating certain beneficiaries.  Some years pass and then you decide to revise your Will to alter the distribution of your estate, but you forget about the old TOD account (which is not changed by a new Will).

• Your TOD account designates your grandchildren as beneficiaries.  The account grows in value subjecting the assets to generation skipping transfer (“GST”) tax of 40% on the amount which exceeds the exemption (around $5.5M) at your death.  This tax is in addition to the estate tax.  If the account had passed under your Will instead, your attorney could have limited the amount passing to your grandchildren to the exemption amount and avoided the GST tax.

• You predecease your wife.  Your Will sets up a “credit shelter trust” for your wife designed to avoid having assets in that trust subject to estate tax at her death.  Your assets, however, are held entirely in a TOD account which designates your wife as beneficiary, so that there are no assets to fund the trust.  The TOD assets will be included in your wife’s estate.

The bottom line is that we generally advise against setting up TOD accounts.  However, if you do set up a TOD account, please let your estate planning attorney know since it affects your overall estate plan.  You may end up unintentionally benefiting people unequally or subjecting your estate to taxes.  For more information, please contact Lisa F. Metz (lmetz@brodywilk.com).