An individual TOD account is a brokerage or investment account with a Transfer on Death designation attached, meaning you name one or more beneficiaries who automatically receive the assets when you die, without the account passing through probate. During your lifetime the account is entirely yours: you trade, withdraw, or close it at will, and you can change the beneficiaries whenever you want. The designation only takes legal effect at the moment of your death.
How the Designation Works
A TOD designation is a contract between you and your financial institution. You register beneficiaries on the account, and the institution agrees to transfer the assets directly to those people when you die. The transfer happens outside probate, so there’s no court oversight, no executor involvement for those specific assets, and no public record of who received what.
While you’re alive, the designation has no practical effect on your ownership. You don’t need your beneficiaries’ permission to buy, sell, or spend anything, and you don’t have to tell them the account exists.1Cornell Law School. Uniform Transfer-on-Death Securities Registration Act They have no legal interest in the account until you die.
TOD designations are available on stocks, bonds, mutual funds, ETFs, and other securities held in brokerage or investment accounts. They work under the Uniform Transfer-on-Death Securities Registration Act, which nearly every state has adopted in some form.2FINRA. Plan Now to Smooth the Transfer of Your Brokerage Account Assets on Death
One point trips people up more than any other: the TOD form beats your will. If your will leaves the brokerage account to your sister but the TOD form on file names your brother, your brother gets the assets.2FINRA. Plan Now to Smooth the Transfer of Your Brokerage Account Assets on Death The institution follows the form, not the will. Keeping the designation current is not optional.
TOD vs. Joint Ownership
People sometimes reach for joint ownership when a TOD designation is what they actually want. Both pass assets outside probate, but the difference during your lifetime is enormous.
A joint owner is a co-owner right now. They can withdraw funds, their creditors may be able to reach the account, and adding them can be treated as a completed gift for tax purposes. A TOD beneficiary has none of that. No access, no ownership interest, no exposure to their creditors, no gift tax event.
Removing a joint owner can require their cooperation or a court order if the relationship goes bad. Removing a TOD beneficiary takes one form.
Naming and Updating Beneficiaries
To set up a TOD designation, you complete a form from the brokerage. It asks for each beneficiary’s full legal name, address, Social Security number, and share of the account as a percentage or fraction. Most institutions also ask for date of birth and relationship to you.
Name both primary and contingent beneficiaries. The primary is first in line; the contingent steps in if the primary dies before you do. Without a contingent, the account can end up in probate anyway when the primary predeceases you.
Per Capita or Per Stirpes
When you list more than one beneficiary, the form usually asks which distribution method you want:
- Per capita splits the account equally among the beneficiaries who are alive when you die. If one dies before you, their share gets redistributed among the survivors.
- Per stirpes sends a deceased beneficiary’s share down to their own descendants instead.
The distinction matters most for families with grandchildren. Name your three children per stirpes and one child dies before you, that child’s share goes to their kids. Per capita would cut the grandchildren out and split the account between your two surviving children.
How Changes Take Effect
Updating a designation means submitting a new form to the institution. The change is effective only when the institution processes and acknowledges it. A note in your will, a letter to your lawyer, or a conversation with your family does nothing. If the form on file is stale when you die, the stale form controls.
Life Events That Should Trigger a Review
Outdated beneficiary designations are one of the more common estate planning failures. A few situations call for an immediate update.
Divorce
Many states have revocation-on-divorce statutes that automatically void a designation naming an ex-spouse, but not all do, and the rules differ where they exist. Your brokerage also may not know about the divorce and could transfer assets based on whatever form is on file. Submit a new form after any divorce, regardless of what state law says.
Naming a Minor
Naming a child under 18 creates a real problem. Minors can’t legally take ownership of investment assets, so the brokerage won’t transfer the account to them directly. A court usually has to appoint a custodian or guardian first, which can take months and reintroduces the court involvement the TOD was meant to avoid.
A cleaner approach is to name an adult custodian under the Uniform Transfers to Minors Act, or to establish a trust for the child and name the trust as the beneficiary. Both let you decide who manages the money and when the child gets access.
Naming a Charity
Nonprofits can be TOD beneficiaries. Use the organization’s full legal name and federal tax identification number to prevent ambiguity, and if you’re splitting the account between a charity and individuals, spell out the percentage shares.
What Happens After You Die
The beneficiary contacts the brokerage to start the transfer. The institution will ask for:
- A certified death certificate (original or certified copy, not a photocopy).
- Government-issued photo ID for the beneficiary.
- The institution’s transfer request form.
Once the paperwork clears, the brokerage retitles the assets from your name to the beneficiary’s. The transfer is usually done in kind, meaning the actual securities move over rather than being sold. If you inherit 200 shares of a stock, you receive 200 shares, not the cash equivalent.
For accounts with multiple beneficiaries, the institution opens a separate account for each person and divides the portfolio by the percentages on the form. The full process generally takes two to six weeks after documents are submitted, compared with months or years for probate.
Tax Treatment
Step-Up in Basis
Under Internal Revenue Code Section 1014, the beneficiary’s cost basis resets to the fair market value of the assets on the date of the owner’s death, regardless of what the original owner paid.3Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired From a Decedent Say you bought stock decades ago for $10,000 and it’s worth $100,000 when you die. Your beneficiary’s basis is $100,000, so if they sell right away there’s little or no capital gains tax. Without the step-up, they’d owe tax on $90,000 of gains.
Federal Estate Tax
Avoiding probate is not the same as avoiding estate tax. The full value of a TOD account is included in the gross estate for federal estate tax purposes.4IRS. Instructions for Form 706 For deaths in 2026, the federal exemption is $15,000,000 per individual, and married couples who plan properly can shield up to $30,000,000 combined.5IRS. What’s New – Estate and Gift Tax Most estates fall well below that, but the exemption has moved significantly in recent years and could move again.
State Estate and Inheritance Taxes
A handful of states impose their own estate or inheritance taxes at much lower thresholds. Six states levy an inheritance tax where the rate depends on the beneficiary’s relationship to the deceased: a surviving spouse typically pays nothing, but siblings or unrelated beneficiaries can face rates in the double digits. TOD assets are not exempt from these taxes just because they skipped probate.
Where a TOD Account Falls Short
The tool is useful but limited. Treating it as a full estate plan is where people get into trouble.
Creditors
While you’re alive, the account is fully exposed to your creditors because you still own it. After death, if the probate estate can’t cover your debts, creditors in many states can pursue non-probate assets, including TOD transfers. Your beneficiary may be liable for those debts up to the value of what they inherited.
Surviving Spouse Elective Share
Many states give a surviving spouse the right to claim a statutory percentage of the deceased spouse’s estate, and in a number of those states the calculation includes TOD accounts and other non-probate transfers. Naming someone other than your spouse doesn’t guarantee your spouse can’t override the designation.
Incapacity
A TOD designation handles death, not disability. If you have a stroke or develop dementia, no one can manage the account on your behalf unless you’ve executed a durable financial power of attorney. Without one, your family may need to petition for guardianship or conservatorship, which is expensive, slow, and public.
Medicaid
The account still belongs to you, so it counts as an available resource when you apply for Medicaid long-term care benefits. Because a TOD designation is revocable and transfers nothing during your lifetime, setting one up doesn’t start Medicaid’s five-year lookback, but it also doesn’t shield anything.
When It Fits and When It Doesn’t
A TOD designation works well when the situation is straightforward: one account owner, specific people who should get specific investment assets, and no complications. Most brokerages set them up at no charge, and they reliably avoid probate.
The cracks show in harder cases. A blended family, a special needs beneficiary, minor children, creditor exposure, or an estate large enough to raise tax planning questions all point toward a revocable living trust instead. A trust lets you condition distributions, protect assets from a beneficiary’s creditors, provide for someone with a disability without jeopardizing their government benefits, and manage assets during your own incapacity.
For most people, the practical answer is to use TOD designations on brokerage and investment accounts as one piece of a plan that also includes a will, a durable power of attorney, and a healthcare directive. The TOD handles the transfer efficiently; the other documents cover everything it can’t reach.