What it means
Investor.gov, the SEC's investor education site, says TOD registration allows you to pass securities you own directly to another person or entity on your death without going through probate. The executor or administrator of the estate does not have to act to make the transfer happen, and the securities go to whoever you designated.
The beneficiary still has work to do, because Investor.gov says TOD beneficiaries must re-register the securities in their own names, typically by sending a copy of the death certificate and an application for re-registration to the transfer agent. FINRA, the US broker-dealer regulator, adds detail on how it works for brokerage accounts.
With a TOD you keep control of the account assets during your lifetime and can change beneficiaries or cancel the TOD while you are alive, usually by filling out the firm's forms, but after you die the beneficiaries cannot be changed. FINRA compares it to the payable on death mechanism for bank accounts.
A TOD can be used for individual brokerage accounts and non-retirement accounts, such as mutual funds held outside a retirement plan, and your brokerage firm can tell you which accounts qualify. FINRA frames TOD as a tool for non-retirement holdings.
A key risk is a conflict with the will, because FINRA warns that a TOD controls who inherits the assets and supersedes a will or trust. Its example is that if a will splits brokerage assets between two children but the TOD names only one, that child alone receives them and is not obliged to share.
FINRA also notes the account title usually changes to include the beneficiary's name. The rules are set by state law.
Investor.gov says state law, not federal law, governs how securities may be registered, and brokerage firms decide whether to offer TOD, while FINRA says most states have adopted the Uniform TOD Security Registration Act, though some have modified it. Avoiding probate does not avoid estate taxes, which may still apply depending on the size of the estate.
This entry describes the US framework as an example. Other countries use different tools for the same goal, so check local rules and review your beneficiary forms whenever your family circumstances change.
In practice
Real-world examples.
Example
A fictional investor opens a brokerage account and names her daughter as the TOD beneficiary. During her life she buys, sells and withdraws as she likes. When she dies, the account passes to her daughter without probate, although the daughter must still re-register the securities.
Example
A fictional father's will splits his brokerage assets equally between two sons. His TOD form, signed years earlier, names only the older son. The TOD controls, so the older son receives the account and the younger son has no claim to it under the will.
Example
A fictional widow changes her mind about her TOD beneficiary. She fills out her firm's change form while she is alive. The new beneficiary is recorded and the old one is replaced, and she keeps a copy of the confirmation with her estate papers.
Formula
Calculation
There is no formula, only simple arithmetic on the shares named. An account of $120,000 with two TOD beneficiaries named at 50% each passes $120,000 x 0.50 = $60,000 to each, subject to the firm's rules and any taxes.
Beneficiaries need not be equal. If the owner names a daughter at 60% and a son at 40%, the daughter receives $120,000 x 0.60 = $72,000 and the son receives $120,000 x 0.40 = $48,000, and the two amounts add back to $72,000 + $48,000 = $120,000. Shares named must total 100%, otherwise the firm will ask the owner to correct the form.Case study
Seen in the real world.
This case study is fictional and illustrative. Rosa has a brokerage account worth 120,000 and a will that leaves everything to her two children equally. Years ago she signed a TOD form naming only her son Luis. She reviews her accounts with her firm and asks who is recorded as beneficiary.
She finds that the TOD names only Luis. She asks the firm to update it so both children are named at 50 percent each. The firm records the change before she dies. If she had left it, Luis alone would have received the account regardless of the will.
With the change, each child would receive 60,000, and neither needs to open probate for this account. The lesson is to check the beneficiary on each account against the will. The beneficiary form wins, so keep them aligned.
Watch out
Common mistakes.
- Assuming the will controls the account, when a TOD supersedes a will or trust.
- Never reviewing the beneficiary, when it cannot be changed after death.
- Assuming TOD removes estate tax, when it only avoids probate and taxes may still apply.
Questions
People also ask.
What is transfer on death registration?
It is a way to name who receives your securities when you die, passing them without probate. You keep full control while you are alive.
Can I change my TOD beneficiary?
Yes, while you are alive, usually by filling out your firm's forms. After death, the beneficiaries cannot be changed.
Does a TOD beat my will?
Yes. FINRA says it supersedes a will or trust, so keep your beneficiaries consistent with your estate plan.
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