Transfer on Death vs Revocable Trusts

NOTE : This article assumes you already know about the PROBATE process and what it entails in regards to your will and estate when you pass on. If you are not familiar with probate, please click here to learn more.

In order to avoid the process of probate, some or all of your assets can be bequeathed through revocable trusts or titling each individual asset with a “transfer on death” or “beneficiary” designation.

WILL

AVOID PROBATE

Revocable Trust   Transfer on Death

But there are pros and cons to each strategy as follows:

Creation of Trust

Unlike a transfer on death designation which can be implemented at any time, a revocable trust must first be created through a lawyer, or notarized if done by one’s self. It is important to understand one’s state laws when creating a trust because probate is done at the state, not federal level, and each state may have its own subtleties. A revocable trust can cost anywhere from $1000 or more to create, and must be amended in case of major changes or a move to a different state.

Cost and Effort in Titling of Assets

In addition, many of the assets that are put into a trust must be titled to the trust. So your home’s deed and title would have to change from “Mr. Joe Smith” to the “Revocable Trust of Mr. Joe Smith”.

In contrast, a transfer on death designation can accomplish similar objectives without a lot of the hassle. Transfer on death is the same thing as designating a beneficiary for your IRA or 401K. In those cases, it’s mandatory, so IRAs or other retirement accounts should already have a “transfer on death” titling that was created when the accounts were opened.

With taxable mutual fund or stock accounts, bank accounts, real estate, cars, and other types of property, you most likely did not fill out a “transfer on death” designation when you opened the account or purchased the item. But you can do so if you wish to avoid probate, and it’s easy because all you have to do is call your bank or institution and ask them to send you a TOD form. You fill it out and send it back, and that’s usually it. Account numbers or logins don’t change, new signatures don’t have to be obtained. With a revocable trust, you have to redo the whole titling and deed, usually involving new account numbers for all your assets.

So the transfer on death designation is preferable to a revocable trust in terms of ease of asset and beneficiary titling.

Inclusion of Assets with No Deeds

A revocable trust allows one to list property that cannot be officially titled, such as jewelry, furniture, china, and other items. There is no such provision under transfer on death, so usually these assets are allocated under a will or simply gifted to recipients during the estate owner’s lifetime.

Beneficiary Change

With a revocable trust, you can simply change the beneficiaries at the trust level, and it applies to all the assets listed under the trust. Since the assets are OWNED by the trust, any change of trustees, beneficiaries, or anything else applies to everything titled to the trust.

With transfer on death, each asset is on its own. So a beneficiary change would have to be done for each asset rather than once. However there is usually no cost to a change in transfer on death designation, whereas there is a cost to changing a revocable trust document either through a lawyer or by having it re-notarized each time it’s amended.

Subtrusts

In addition, a revocable trust can be used to create subtrusts for minor or special needs children. A transfer on death designation involves no such capability.

In summary, there are pros and cons to each choice — revocable trust or transfer on death. Both can help assets bypass probate, and ensure that your hard earned money goes to your loved ones instead of Uncle Sam or probate courts and fees.