Who Can Be a Transfer on Death (TOD) Beneficiary?

A person named as a transfer on death (TOD) beneficiary for an account will receive the assets held in it when the account owner dies. It’s possible to name a TOD beneficiary for many account types—retirement accounts, savings accounts, and even brokerage accounts—and this can help you and your heirs avoid the sometimes costly process of probate. 

The rules are quite broad when it comes to naming TOD beneficiaries. A TOD beneficiary can be a person, charity, business, or trust. If the beneficiary is a person, they can be a relative, child, spouse, friend, or anyone else you happen to know. However, if you are married, your spouse may have special rights over your assets that take precedence over your named TOD beneficiaries.

In this article, we’ll explain who you can name as a TOD beneficiary, and why you would do so.

Naming a Transfer on Death (TOD) Beneficiary

You can name a TOD beneficiary for many account types. For example, Individual retirement accounts (IRAs), 401(k)s, and other retirement accounts can have TOD beneficiaries.

The Uniform Transfer on Death Securities Registration Act in place in most U.S. states lets owners name beneficiaries for their stocks, bonds, or brokerage accounts. It’s also possible to open a payable-on-death bank account to distribute cash assets after you pass away without your heirs having to go through probate. In some states, even vehicles and real estate can be transferred by TOD.

You can name a wide variety of people, organizations, or other entities as a TOD beneficiary. If you want to name a person, they can be almost anyone: a relative, child, friend, or anyone else you happen to know. You can also name a charity, a business, or even a trust.

An unmarried person may choose anyone as a beneficiary, but a married person’s spouse may have rights to some or all of a retirement account upon death. A surviving spouse also may have more options for withdrawing money than other beneficiaries do. The beneficiary rights depend on the rules that apply to each individual account.

You can name as many (or as few) TOD beneficiaries as you like, and you can also specify the percentage of assets that each designated beneficiary should receive. This helps the executor distribute your assets.

You can retain total control over you assets until you pass away. With TOD registration, the named beneficiaries have no access to or control over a person’s assets as long as the person is alive.

Why Designate a TOD Beneficiary?

The primary advantage of naming TOD beneficiaries for your accounts is that you can make the inheritance process much simpler, faster, and less expensive. If you name TOD beneficiaries, it’s clear who you want to receive your assets when you pass away.

The TOD beneficiary instruction allows your heirs to avoid probate for these assets and takes precedence over any will that might be in place. This can make the legal process of distributing assets much faster.

Still, naming TOD beneficiaries may not achieve everything you would like to in your inheritance settlement. Passing on assets in this way doesn’t provide much in the way of creditor protection, for instance—in that case, a trust may be a better option.

In addition, your TOD beneficiaries will be responsible for paying taxes on the money they receive in this way. This will complicate their tax situation and could result in a large tax bill for them.

Consider consulting with a professional financial advisor who can guide you through the pros and cons of naming TOD beneficiaries as it relates to your long-term goals and financial situation.

The Bottom Line

Naming a TOD beneficiary for your accounts can make the inheritance process much simpler, because your named beneficiary will automatically receive the assets in the account—bypassing probate as a result. You can name almost anyone as a TOD beneficiary: family, friends, or anyone else. You can also name charities, businesses, or trusts. 

Many account types allow you to name a TOD beneficiary. You can add a TOD beneficiary to retirement accounts, CDs, and even brokerage accounts. To do so, contact your account providers.