It is never easy to deal with a death in the family, but the process of grieving can be made worse when assets needed by family members are tied up in probate. Fortunately, there are options that allow assets to pass directly from a deceased person, or decedent, to his or her intended beneficiaries without going through probate in Colorado. One such option is “transfer on death” (TOD) agreements, which are also referred to as “payable on death” (POD) agreements.
What is a Transfer-on-Death Agreement?
Colorado, like most states, has adopted a law called the Uniform Transfer-on-Death Securities Registration Act. This law allows you to designate a person or entity (or multiple people and/or entities) to inherit your stocks, bonds, and brokerage accounts upon your death. You can typically designate beneficiaries to receive different percentages of your holdings if you wish; for instance, you might designate your spouse to receive fifty percent, and each of your two adult children to receive twenty-five percent.
With a valid transfer-on-death agreement or registration on file, your intended beneficiaries can notify the stockbroker or investment company of your death. The company will then provide claim forms and instructions to all of your beneficiaries so that the assets can be transferred into their ownership.
With a transfer-on-death agreement, your assets remain entirely within your control during your lifetime. You may revoke the agreement or update it, changing beneficiaries or the percentage of assets each beneficiary is to receive. There are usually nominal fees associated with putting a transfer-on-death agreement in place, but they are typically less than creating a living trust to allow the same assets to bypass probate
When Can I Use a Transfer-on-Death Agreement?
You may put a transfer-on-death agreement in place when you open an investment account or at any time thereafter. Although Colorado is not a community property state, it may be necessary for you to have a spousal consent form in order to execute a transfer-on-death agreement. This is especially true if you have ever lived in a community property state while married, or if designating someone other than your spouse as a primary beneficiary.
As with retirement accounts, trusts, and insurance policies, it is wise to designate contingent beneficiaries to receive the assets in the event your primary beneficiary or beneficiaries predecease you. Otherwise, the assets will revert to your estate, where they will be subject to probate. You should review transfer-on-death agreements at least every couple of years to make sure your beneficiary designations are still appropriate.
Disadvantages to Transfer-on-Death Agreements
It sounds like transfer-on-death accounts are a low-cost, low-stress way of transferring ownership of stocks, bonds, and investments on death. That is true, to a certain extent, but there are certain disadvantages. In settling more than one hundred estates each year we see five common problems when passing assets using a TOD or beneficiary designation approach. One is that the owner loses control after death because the beneficiary inherits the asset outright without any asset protection and can do with it whatever he or she pleases. Another common issue is that the decedent did not keep the beneficiary designation current as relationships changed. (i.e. “I left it to my ex-spouse or a deceased person!”). Problems may also arise due to the beneficiary’s age. If the beneficiary is “too young,” under eighteen years old, the TOD may trigger an avoidable and expensive conservatorship. The beneficiary may be a legal adult unprepared to deal with managing significant assets: in other words, “old enough but too young” to effectively manage the inheritance. Lastly, the beneficiary may be “too old”; he or she may be vulnerable to theft or fraud, and/or not able to manage the inheritance.
A transfer-on-death account usually receives the assets “outright” without the provisions or protection that can be offered in transferring assets via a Revocable Living Trust. In short, transfer-on-death agreements can be useful estate planning tools, but they are not right for everyone in every situation. Consult the experienced estate planning attorneys at Davis Schilken to see if transfer-on-death is right for you under your particular set of circumstances. Contact us at 303-670-9855 to arrange a consultation at one of our two locations in The Denver Tech Center and Golden, Colorado. We look forward to working with you.