How Does a TOD Designation Work?
You complete a TOD form with your brokerage, financial institution, or county recorder (for real estate). You name one or more beneficiaries and specify percentage splits. During your lifetime, the designation has no effect — you can buy, sell, withdraw, or change beneficiaries at any time. Upon your death, beneficiaries present a death certificate to the institution and receive the assets directly, typically within days to weeks. No court involvement or attorney is required.
What Accounts Can Have a TOD Designation?
TOD designations are available for individual brokerage accounts, individual stocks and bonds, mutual fund accounts, and in many states, real estate through TOD deeds. Joint accounts typically pass to the surviving owner automatically and don't need TOD designations. Retirement accounts and life insurance use beneficiary designations rather than TOD, but the concept is similar. Bank accounts use the equivalent payable-on-death (POD) designation.
What Are the Limitations of TOD Designations?
TOD designations are simple but limited: they provide no conditions or restrictions on distributions (beneficiaries receive assets outright immediately), they don't account for a beneficiary's incapacity or minor status, and they cannot provide ongoing management. For situations requiring conditional distributions, age-based releases, or special needs planning, a trust is more appropriate. TOD also does not protect assets from a beneficiary's creditors once transferred.
Frequently asked questions
Is a TOD designation better than a trust?
For simple situations with responsible adult beneficiaries, TOD is simpler and free. Trusts are better when you need conditions on distributions, minor beneficiaries, creditor protection, or complex multi-beneficiary arrangements. Many people use TOD for some accounts and trusts for others.
Do TOD assets receive a step-up in basis?
Yes. Assets transferred via TOD receive a step-up in cost basis to the fair market value at the date of death. This eliminates capital gains tax on appreciation during the original owner's lifetime — the same tax benefit as inherited assets received through a will or trust.