As a pure estate planning tool, using a transfer on death clause or “TOD” has a number of pros and cons. And by that, I mean that although using a TOD may be appropriate for some people, it is decidedly NOT appropriate for others.
Can You Avoid Probate in North Carolina by Using a Transfer on Death Clause?
The simple answer is, yes and no. Will a bank account that you have a transfer on death provision assigned to avoid probate?
The only exception could be if you decided to name a minor child as the beneficiary. Since a minor child cannot own property in their own name, then it is possible that this asset would be brought into probate to be managed by a court-appointed custodian.
The other consideration in using a transfer on death provisions is that you can only use these with certain assets, such as bank accounts, investment accounts, mutual funds, etc. In certain states, you may also use a transfer on death deeds for purposes of transferring real estate.
But there are many more assets that cannot be transferred with the use of transfer on death provisions. This list includes personal property, such as your baseball collection, art, fine china, etc.
So basically, you can avoid probate in North Carolina by using a transfer on death provisions, but only where there are no minor children that are inheriting the account, and only on certain types of assets.
Drawbacks of Using a Transfer on Death Clause
The major drawback to using a transfer on death provision is that the transfer will only take place upon the death of the asset holder.
Many people forget that estate planning is not just about planning for what would happen when someone passes away, or as we like to say, “walks out on life.” Estate planning also includes planning for when someone becomes incapacitated and can no longer speak or act for themselves.
As a result, you could have a major problem if the bulk of someone’s assets are in a bank account with a transfer on death provision, and that person becomes incapacitated.
In North Carolina, there are only two ways to transfer assets. The first is through someone’s signature, and the second is through a court order. So if you find yourself in a situation where your loved one (could be a spouse, parent, adult child, etc.) is incapacitated and the only assets they have are in a transfer on death account, you could find yourself in real trouble.
This is especially true if you need those funds to pay household bills for your loved one or even for their own medical care. Because they would be unavailable to sign the account over to you, then you would be forced to hire a lawyer and file a guardianship in North Carolina.
This is a court proceeding (and trust me, going to court always takes much longer than you anticipate it should), whereby a judge would, eventually, give you access to that bank account, possibly with court supervision, to use those funds for the benefit of your loved one.
Obviously, this is not an ideal scenario.
Why Avoid Probate in North Carolina?
Before we get into the alternatives to using a transfer on death clause to avoid probate in North Carolina, perhaps it is helpful to discuss why anyone would want to avoid probate in the first place.
There are several main reasons to avoid probate in North Carolina.
First, probate is a lengthy process that can take time. Probate is a court proceeding and typically takes 9-12 months to complete. This means that your bank account that could have been paid out relatively quickly with a transfer on death provision is now frozen until it can be distributed by a North Carolina probate judge.
Second, in probate, you must give notice to any creditors of the estate. There is a pecking order to who would receive the estate assets in which order, but creditors would typically get paid before the beneficiaries of the estate.
Third, probate in North Carolina can be expensive. The costs of probate typically run from 3-8% of the total assets of the estate. These costs would include filing fees, legal fees, appraisal fees, executor commissions, bond premiums, etc. All of this can be avoided by using a transfer on death provision.
Finally, probate is a very public process. It is not unheard of for scam artists and other opportunity seekers to stake out the probate court filings, looking for large estates and the names of the beneficiaries so that they can target them with advertising, business opportunities, etc. to try to separate your intended heirs from their money.
In addition, debt collectors will also monitor the probate filings and run cross-checks against their databases to see if someone who owes them money is in a position to inherit funds.
Clearly, using a transfer on death provision could avoid all of these situations and ensure that your heirs get paid their inheritance quickly and efficiently after you walk out on life.
Alternatives to a Transfer on Death Clause that will Avoid Probate
There are several major drawbacks to using a transfer on death clause for your financial accounts.
First, as already mentioned, using a transfer on death designation will not help you or your loved ones in the event of your incapacity.
Second, a transfer on death designation does not protect your heirs from themselves or potential creditors. As I discussed in yesterday’s blog post, asset protection planning is a big part of estate planning in North Carolina. Using only a transfer on death designation will not provide any asset protection to your heirs.
Finally, a transfer on death clause only avoids probate for some of your assets, but not all of them. It is possible that you may have real property (i.e. a home), personal property, or other titled assets such as a vehicle that will still need to pass through the probate process.
Final Thoughts on Transfer on Death Clauses
So what’s the final verdict on transfer on death clauses? It’s a mixed bag, to be honest. In certain situations, provided you don’t become incapacitated, they can be a great tool for effective estate planning.
However, for those that don’t understand how these tools work in the grand scheme of things or have not done a proper amount of incapacity planning, they may be a wolf in sheep’s clothing.
Interested in learning more?
As a North Carolina Estate Planning Attorney, James Hart can help you navigate these issues and determine whether you should be using a transfer on death clause in your overall estate plan.
The first step of the process is to schedule a no-cost wealth planning session (normally a $350 value) to anyone that mentions this article when they schedule their session. You may get on our calendar either calling us at (919) 883-4861 or by submitting an online contact form.
However, we do limit the number of free sessions we offer per month, so please call (919) 883-4861 to reserve your spot today!