Ask Ric: Kurt from Glendale California

Learn about TOD Designations and Estate Planning Tips to Skip The Probate Process

Ric: Let's take a phone call here on the Truth About Your Future. Let's talk with Kurt. He's in Glendale, California. Welcome to the program, Kurt. How are you?

Kurt: I'm well. Thank you so much. I have a question. My mother and father had a joint investment accounts at Vanguard. The accounts are not retirement accounts. Both of my parents have a will. Both will stipulate “per stirpes” rather than per capita.

Ric: Okay, so “per stirpes”, means when they die, the assets pass to the three (Kurt and his two sisters) of you equally unless they split it up differently among your siblings. Do you have children, Kurt?

Kurt: I do not.

Ric: Do your sisters have children?

Kurt: My one sister has four children.

Ric: Okay. So here's the deal. Under “per stirpes”, if your sister dies before your parents die, her share of the inheritance will go to her four children without the first surprise listing. If she were to die before your parents, her share of the inheritance would go to you and your other sibling instead of her children. So “per stirpes”, protects the line of Ascension. So this way her children will get her share of the inheritance. That's the purpose of “per stirpes”.

Kurt: Okay, great. So our father passed away in February. I'm giving everything to our mother. An individual account at Vanguard was set up for our mother when our father passed and those joint nonretirement funds were then transferred to her individual account. My oldest sister also has full agent authorization for my mother's individual Vanguard account.

Ric: Okay.

Kurt: So, like we said, I have two sisters. Is it wise to set up beneficiaries and use a “TOD” with our mother's individual Vanguard accounts now? Or is it better to wait for the will to be probated upon her death?

Nobody Likes Probate: So meet TOD: Transfer on Death

Ric: Okay, first of all, nobody calls it a tod. It's called TOD. We love acronyms in our industry. TOD for transfer on death. In other words, here's how it's set up. Your mom's account is in her name only as a single individual because it's a taxable account, an individual account. Her will is going to dictate how that asset gets distributed upon her death. And if the will says that the money goes to the three children equally, then that's what's going to happen. The problem, of course, is that Wills have to go through probate court. That takes many, many months and many jurisdictions a year or more, subjecting it to public scrutiny. Your neighbors, your Mom’s neighbors can find out what the will says and, in many cases, legal expenses. That can be as much as 5% of the value of the asset. Very much of a hassle. Nobody likes probate. There are ways to avoid the probate process. And you've just mentioned a very common one, TOD, transfer on death. In other words, we change the account registration so that it is not in your Mom's name only. Instead it says Mom’s TOD names of the three children. This way when Mom dies, the money is transferred immediately. As soon as you all notify Vanguard and send them a death certificate, Vanguard will distribute the money equally to the three people named under the TOD transfer on death.

You skip the probate process. So yes, TOD, registration is a very good idea if you want to avoid the probate process. But there might be reasons within the family that that isn't the ideal solution. For example, let's say that one of the three of you is a drug addict. Or one of the three of you is in jail or one of the three of you was a minor under the age of 18 who legally can't inherit assets or what if fill in the blank for whatever particular reason, a spendthrift or in a bad marriage. And you're afraid that the inheritance going to the sister would end up going to the soon to be ex-husband? There are lots of reasons why you might not want to distribute the money immediately upon death to everybody equally. The TOD doesn't allow you to alter it. It's simple, it's quick, it's easy. But it's also unable to be modified for this reason. What you might want to do instead is have your mom create a revocable living trust and title that account into the name of the trust.

Inside of a trust, you can have much more elaborate sets of rules. For example, I'll allow two of the children to get their inheritance right away. But the drug addict or the person who's in jail, there are going to be conditions under which they get the money. For example, they can't get the money until they're out of jail or they can't get their money until the 35, or they can't get to the money until they're out of rehab or we're not going to give them the money at all. Instead, we'll give them an allowance. We'll give them a monthly check for life, because if I gave them a lump sum of money, the money would be gone within a few weeks. So you can create the criteria under which the inheritance is distributed and you can do differently for each heir rather than treating everybody the same all at once. So you know your family best, as does your mom. And you can determine with your sisters as to whether or not you need to go the trust route. But failing that, yeah, the TOD is probably a good, easy, convenient solution to the problem.

Kurt: Okay, so we don't have to worry about going to probate at all with her will if we do a TOD?

Ric: Or at least regarding that asset. Now she has other assets. I'm assuming beyond this one account.

Kurt: We'll just focus on this this one situation that I'm calling.

Ric: Okay. If this one asset is titled as TOD, it skips probate. But if she owns a house, if she owns a car, if she has other investment accounts elsewhere or other financial assets, bank accounts, etc., those are all still going to go through probate.

Kurt: And if I may also ask, should our father's will go through probate as well?

Ric: It has to.

Kurt: Okay. I think that's it. Thank you very much.

Ric: I'm very glad I was able to be helpful to you, Kurt. And I wish you in the very best. And my condolences to your mom and your sisters and yourself and the loss of your dad. Thank you. That was Kurt in Glendale, California, here on The Truth About Your Future. You got a question? Do the same thing that Kurt did. Send me an email to askRic@thetruthayf.com.