TOD, JTWROS – what do these obscure acronyms signify? They are shorthand for transfer on deathand joint tenancy with right of survivorship – two designations that permit automatic transfer of bank or investment accounts from a deceased spouse to a surviving spouse.
This automatic transfer of assets reflects a legal tenet called the right of survivorship –the idea that the surviving partner should be the default beneficiary of the account. In some states, a TOD or JTWROS beneficiary designation is even allowed for real property.
When an account or asset has a TOD or JTWROS designation, the right of survivorship precedes any beneficiary designations made in a will or trust.
There are advantages to having TOD and JTWROS accounts – and disadvantages as well.
As TOD and JTWROS beneficiary designations define a direct route for account transfer, there is rarely any need for such assets to be probated. The involved financial institution has a contractual requirement (per the TOD or JTWROS designation) to pay the balance of the account funds to the surviving partner.
In unusual instances, an exception may apply: if the deceased account owner has outlived the designated TOD beneficiary or beneficiaries, then the account faces probate.
What happens if both owners of a JTWROS account pass away at the same time? In such cases, a TOD designation applies (for any named contingent beneficiary).
To be technically clear, transfer on deathsignifies a route of asset transfer, while joint tenancy with right of survivorship signifies a form of asset ownership. In a variation on JTWROS called tenants by entirety,both spouses are legally deemed as equal owners of the asset or account while living, with the asset or account eventually transferring to the longer-living spouse.
Does a TOD or JTWROS designation remove an account from your taxable estate?
No. A TOD or JTWROS designation makes those assets non-probate assets, and that may save your executor a little money and time – but it doesn’t take them out of your gross taxable estate.
In fact, 100% of the value of an account with a TOD beneficiary designation will be included in your taxable estate. It varies for accounts titled as JTWROS. If you hold the title to a JTWROS account with your spouse, 50% of its value will be included in your taxable estate. If it is titled as JTWROS with someone besides your spouse, the entire value of the account may go into your taxable estate, unless the other owner has made contributions to the account.
How about capital gains?
JTWROS accounts in common law states typically get a 50% step-up in basis upon the death of one owner. In community property states, the step-up is 100%.
Could gift tax become a concern?
Yes, if the other owner of a JTWROS account is not your spouse. If you change the title on an account to permit JTWROS, you are giving away a percentage of your assets; the non-spouse receives a gift from you. If the amount of the gift exceeds the annual gift tax exclusion, you will need to file a gift tax return for that year. If you retitle the account in the future, so that you are again the sole owner, that constitutes a gift to you on behalf of the former co-owner; they will need to file a gift tax return if the amount of the gift tops the annual exclusion.
TOD & JTWROS designations are designed to make account transfer easy.
They simplify an element of estate strategy.
TOD or JTWROS accounts are not cheap substitutes for wills or trusts.
If you have multiple children and name one of them as the TOD beneficiary of an account, that child will get the entire account balance, and the other kids will get nothing. The TOD beneficiary can of course divvy up those assets equally among siblings, but in doing so, that TOD beneficiary may run afoul of the yearly gift tax exclusion.
As you create your estate, respect the power of TOD & JTWROS designations.
Since they override any beneficiary designations made in wills and trusts, you want to double-check any will and trust(s) you have, to make sure that you aren’t sending conflicting messages to your heirs.
That aside, TOD & JTWROS designations can represent a convenient way to arrange the smooth, orderly transfer of account balances when original account owners pass away.
TOD and JTWROS accounts ensure your assets end up with the people you intended. Plus, your family will already have plenty of grieving and other matters to handle after your passing. They don't need more stress and discord from poorly structured finances.
Transfer on death, or TOD, accounts are different from JTWROS or tenants in common accounts because the beneficiary has no ownership rights until the original owner dies. TOD accounts do avoid probate, though, as the assets are transferred immediately.
Unlike joint tenancy with the right of survivorship, the transfer on death beneficiary for property does not automatically transfer the title to the designated beneficiary. If there is another co-owner, most states give that joint tenant a certain amount of time to challenge the title on the property.
Beneficiary designations allow assets to pass directly to whomever you designate thus by-passing the costs and time involved with the probate process. In some cases, more value passes by beneficiary designations than under a will. Beneficiary designations are easy to make and relatively easy to change.
While joint tenancy is a common form of co-ownership between two or more people, transfer on death is a process where the owner of an asset designates a beneficiary who will receive the asset upon the owner's death.
A significant downfall with relying upon TOD or POD account registration to administer your assets upon death is that there might not be remaining assets in your estate to cover such expenses.
For most survivorship arrangements, you will see that estate taxes are generally applied, meaning that the survivor who gets the portion of the property will have to pay taxes on the value of that portion. This is true for right of survivorship arrangements as well.
For joint ownership with right of survivorship or tenants by entirety accounts, the joint registration transfers account ownership upon the first death, usually directly to the surviving accountholder. TOD becomes effective for joint accounts if both owners pass away simultaneously.
Survivorship requirement are designed to come into play in case of the simultaneous (or near-simultaneous) death of a will-maker and a major beneficiary—for example, a husband and wife. Such occurrences are extremely rare in real life, but the possibility worries a lot of people when they sit down to write their wills.
A beneficiary designation overrides any provisions in a Trust or a Will. Common categories of beneficiaries include designated beneficiaries and contingent beneficiaries. Different eligibility rules may apply to different types of beneficiaries.
Where the timing or the evidence does not line up, you may be able to prove fraud or undue influence and invalidate the beneficiary designation. In addition to these forms of evidence, a beneficiary designation challenge due to undue influence involves a very similar analysis to a will challenge for the same reason.
A beneficiary is the person or entity that you legally designate to receive the benefits from your financial products. For life insurance coverage, that is the death benefit your policy will pay if you die.
In some states, a TOD or JTWROS beneficiary designation is even allowed for real property. When an account or asset has a TOD or JTWROS designation, the right of survivorship precedes any beneficiary designations made in a will or trust.
NOTE: If you co-own the property as joint tenancy or community property with right of survivorship, the other owner receives your share of the property upon your death. The TOD deed has no effect unless you outlive your co-owner.
A beneficiary form states who will directly inherit the asset at your death. Under a TOD arrangement, you keep full control of the asset during your lifetime and pay taxes on any income the asset generates as you own it outright. TOD arrangements require minimal paperwork to establish.
The surviving shareholder(s) of a joint holding may deal with the holding upon production of a certified copy of the shareholder's death certificate. If all the joint shareholders are deceased, the executor(s) or administrator(s) of the last holder to die may deal with the holding.
Disadvantages. The most obvious disadvantage is that individuals can't pass or will their ownership stake to their heirs. Those who want to own property but don't want to give survivorship to the other owner(s) shouldn't consider this kind of agreement.
Designated beneficiaries receive the funds without having to wait for probate to conclude, which can take months. A POD or TOD account allows loved ones to get money almost immediately. Typically, all they need to provide is the death certificate and identification to the account-holding institution.
Transfer on death accounts are similar to “payable on death" (POD) accounts, with both transferring assets to beneficiaries after the account owner dies. Typically, TOD designations are used for stocks, bonds, mutual funds and other brokerage accounts, while POD designations are used for bank accounts.
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