Transfer On Death and Last Wills

On another web site, I answer user questions on estate planning and business law topics. Not infrequently, I receive questions displaying confusion with the interaction of transfer on death designations and beneficiary designations in a last will. Let's try and break it down.

What is a transfer on death designation?
A Transfer on Death (TOD) designation transfers ownership of designated property to named beneficiaries upon your death without the necessity of probate the designated property. There are two uniform laws which authorize transfer on death designations: (a) Uniform TOD Security Registration Act and (b) Uniform Nonprobate Transfers On Death Act. Of the two, the Uniform TOD Security Registration Act is more popular having been adopted by 48 states and the District of Columbia. As the name implies, this act only allows TOD designation for securities defined as "a share, participation, or other interest in property, in a business, or in an obligation of an enterprise or other issuer, and includes a certificated security, an uncertificated security, and a security account." The Uniform Nonprobate Transfers on Death Act enacted in 1989 has become part of the Uniform Probate Code (see Article VI). Section Section 6‑101 of the Uniform Probate Code significantly expands the categories of property that can be subject to a nonprobate transfer:

A provision for a nonprobate transfer on death in an insurance policy, contract of employment, bond, mortgage, promissory note, certificated or uncertificated security, account agreement, custodial agreement, deposit agreement, compensation plan, pension plan, individual retirement plan, employee benefit plan, trust, conveyance, deed of gift, marital property agreement, or other written instrument of a similar nature is nontestamentary.

How are nonprobate transfers different from naming a beneficary in a will?

The obvious difference is that the property subject to a TOD transfer becomes the property of the beneficiary immediately upon the death of the transferor. No probate, no court order is necessary. Another major difference stemming from the first point is that special probate rules do not apply to TOD transfers. For instance, if you name your spouse as the TOD beneficiary, divorce her, then die, the TOD designation is still effective and she will take the property. The probate codes of all states (to my knowledge) invalidate bequests by will to a former spouse where the will was created pre-divorce. Another probate concept is forced shares for minor children and spouses. TOD property is not eligible for apportionment to children and spouses of the deceased although it is often included in the calculation of the augmented estate for purposes of determining the minor child or spouse's eligible elective share of an estate.

Use of TOD in blended family situations

A common situation in our society today is blended families: i.e., one where the husband and wife have children from prior relationships. In such cases, each spouse often desires to have a separate specific bequest made for his or her children that were not by the current spouse. Naming the child as beneficiary of a life insurance policy or TOD designation are two options for providing for the children without making them beneficiaries under the will. I particularly prefer this option when the children from the prior relationship do not get along with the new spouse who is apt to be named the executor of the estate. TOD takes away the potential for disputes with the step parent over the estate as they will not be beneficiaries of the estate.