How Transfer on Death (TOD) Accounts Help You Avoid Probate
Confused about transfer-on-death (TOD) accounts? This article answers the most common questions about Transfer on Death designations, how they work, and how they can help you avoid probate.
As an investment firm, we typically encourage clients to add TOD beneficiaries to their individual brokerage accounts to avoid the probate process, should the owner of the account unexpectedly pass away. TOD stands for “Transfer on Death”. When someone passes away, their assets pass to their beneficiaries in one of three ways:
Probate
Contract
Trust
Passing Asset by Contract
When you set up an IRA, 401(K), annuity, or life insurance policy, at some point during the account opening process, the custodian or life insurance company will ask you to list beneficiaries on your account. This is a standard procedure for these types of accounts because when the account owner passes away, they look at the beneficiary form completed by the account owner, and the assets pass “by contract” to the beneficiaries listed on the account. Since these accounts pass by contract, they automatically avoid the headaches of the probate process.
Probate
Non-retirement accounts like brokerage accounts, savings accounts, and checking accounts are often set up in an individual's name without beneficiaries listed on the account. If someone that passes away has one of these accounts, the decedent’s last will and testament determines who will receive the balance in those accounts - but those accounts are required to go through a legal process called “probate”. The probate process is required to transfer the decedent’s assets into their “estate”, and then ultimately distribute the assets of the estate to the estate beneficiaries.
Since the probate process involves the public court system, it can often take months before the assets of the estate are distributed to the beneficiaries of the estate. Depending on the size and complexity of the estate, there could also be expenses associated with the probate process, including but not limited to court filing fees, attorney fees, accountant fees, executor fees, appraiser fees, or valuation experts.
For this reason, many estate plans aim to avoid probate whenever possible.
Transfer On Death Designation
A very easy solution to avoid the probate process for brokerage accounts, checking accounts, and savings accounts, is to add a TOD designation to the account. The process of turning an individual account into a Transfer on Death account is also very easy because it usually only involves completing a Transfer-on-Death form, which lists the name and percentages of the beneficiaries assigned to the account. Once an individual account has been changed into a TOD account, if the account owner were to pass away, that account no longer goes through the probate process; it now passes to the beneficiaries by contract, similar to an IRA.
Frequently Asked Questions About TOD Accounts
After we explain the TOD strategy to clients, there are often several commonly asked questions that follow, so I’ll list them in a question-and-answer format:
Q: Can you change the beneficiaries listed on a TOD account at any time?
A: Yes, the beneficiaries assigned to a TOD account can be changed at any time by completing an updated TOD designation form
Q: If I list TOD beneficiaries on all of my non-retirement accounts, do I still need a will?
A: We strongly recommend that everyone execute a will for assets that are difficult to list TOD beneficiaries, such as a car, jewelry, household items, and for any other assets that don’t pass by contract or by trust.
Q: Can I list TOD beneficiaries on my house?
A: It depends on what state you live in. Currently, 31 states allow TOD deeds for real estate. New York became the newest state added to the list in 2024.
Q: Can my TOD beneficiaries be the same as my will?
A: Yes, you can make the TOD beneficiaries the same as your will. However, since TOD accounts pass by contract and not by your will, you can make beneficiary designations other than what is listed in your will.
Q: Can I list different beneficiaries on each TOD account (brokerage, checking, savings)?
A: Yes
Q: Can I list a trust as the beneficiary of my TOD account?
A: Yes
About Michael……...
Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.
How to Avoid the New York State Estate Tax Cliff
When someone passes away in New York, in 2025, there is a $7.16 million estate tax exclusion amount, which is significantly lower than the $13.9M exemption amount available at the federal level. However, in addition to the lower estate tax exemption amount, there are also two estate tax traps specific to New York that residents need to be aware of when completing their estate plan. Those two tax traps are:
1) The $7.5 million Cliff Rule
2) No Portability between spouses
With proper estate planning, these tax traps can potentially be avoided, allowing residents of New York to side-step a significant state tax liability when passing assets onto their heirs.
When someone passes away in New York in 2025, there is a $7.16 million estate tax exclusion amount, which is significantly lower than the $13.9M exemption amount available at the federal level. However, in addition to the lower estate tax exemption amount, there are also two estate tax traps specific to New York that residents need to be aware of when completing their estate plan. Those two tax traps are:
The $7.5 million Cliff Rule
No Portability between spouses
With proper estate planning, these tax traps can potentially be avoided, allowing residents of New York to side-step a significant state tax liability when passing assets onto their heirs.
New York Estate Tax Cliff Rule
When it comes to estate planning, it’s important to understand that estate tax rules at the federal and state levels can vary. Some states adhere to the federal rules, but New York is not one of those states. New York has a very punitive “cliff rule” where once an estate reaches a specific dollar amount, the New York estate tax exemption is eliminated, and the ENTIRE value of the estate is subject to New York state tax.
As mentioned above, the New York estate tax exemption for 2025 is $7,160,000. So, for anyone who lives in New York and passes away with an estate that is valued below that amount, they do not have to pay estate tax at the state or federal level.
For individuals that pass away with an estate valued between $7,160,000 and $7,518,000, they pay estate tax to New York only on the amount that exceeds the $7,160,000 threshold.
But the “cliff” happens at $7,518,000. Once an estate in New York exceeds $7,518,000, the ENTIRE estate is subject to New York Estate Tax, which ranges from 3.06% to 16% depending on the size of the estate.
Non-Portability Between Spouses in New York
Married couples that live in New York must be aware of how the portability rules vary between the federal and state levels. “Portability” is something that happens at the passing of the first spouse, and it refers to how much of the unused estate tax exemption can be transferred or “ported” over to the surviving spouse. The $13.9M federal estate tax exemption is “per person” and “full portable”. Why is this important? It’s common for married couples to own most assets “jointly with rights of survivorship”, so when the first spouse passes away, the surviving spouse assumes full ownership of the asset. However, since the spouse who passed away did not have any assets solely in their name, there is nothing to include in their estate, so the $13.9M federal estate tax exemption at the passing of the first spouse goes unused.
At the federal level that’s not an issue because the federal estate tax exemption for a married couple is portable, which means if the first spouse that passes away does not use their full estate tax exemption, any unused exemption amount is transferred to the surviving spouse. Assuming that the spouse who passes away first does not use any of their estate tax exemption, when the second spouse passes, they would have a $27.8 million federal estate tax exemption ($13.9M x 2).
However, New York does not allow portability, so any unused estate tax exemption at the passing of the first spouse is completely lost. The fact that New York does not allow portability requires more proactive estate tax planning prior to the passing of the first spouse.
Here is a quick example showing how this works: Larry & Kathy are married and have an estate valued at $10M in which most of their assets are titled jointly with rights of survivorship. Since everything is titled jointly, if Larry were to pass away in 2025, the $10M in assets would transfer over to Kathy with no estate taxes due at either the Federal or State level. The problem arises when Kathy passes away 2 years later. Assuming Kathy passes away with the same $10M in her name, there is still no federal estate taxes due because she more than covered by the $27.8M exemption at the federal level, however, because New York’s estate tax exemption is not portable, and her assets are well over the $7.5M cliff, the full $10M would be taxed by the New York level, resulting in close to a $1M tax liability. A tax liability that could have been completely avoided with proper estate planning.
If instead of Larry and Kathy holding all of their assets jointly, they had segregated their assets to $5M owned by Larry and $5M owned by Kathy, when Larry passed away, he would have been able to use his $7.1M New York State estate tax exemption to protect the full $5M. Then, when Kathy passed with her $5M two years later, she would have been able to use her full $7.1M New York State tax exemption, resulting in $0 in taxes paid to New York State — avoiding nearly $1M in unnecessary tax liability.
Setting Up Separate Trusts
A common solution that our clients will use to address both the $7.5M cliff and the non-portability issue in New York is that each spouse will set up their own revocable trust, and then split the non-retirement account assets in a way to maximize the $7.1M New York State exemption amount at the passing of the first spouse.
I will sometimes hear married couples say “Well, we don’t have to worry about this because our total estate is only $6 million.” That would be true today, but if that married couple is only 70 years old, and they are both in good health, what if their assets double in size before the first spouse passes? Now they have a problem.
Special Legal Disclosure: This article is for educational purposes only, and it does not contain any legal advice. For legal advice, please contact an attorney.
About Michael……...
Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.
Multi-Generational Roth Conversion Planning
With the new 10-Year Rule in effect, passing along a Traditional IRA could create a major tax burden for your beneficiaries. One strategy gaining traction among high-net-worth families and retirees is the “Next Gen Roth Conversion Strategy.” By paying tax now at lower rates, you may be able to pass on a fully tax-free Roth IRA—one that continues growing tax-free for years after the original account owner has passed away.
With the new 10-Year Rule in place for non-spouse beneficiaries of retirement accounts, one of the new tax strategies for passing tax-free wealth to the next generation is something called the “Next Gen Roth Conversion Strategy”. This tax strategy works extremely well when the beneficiaries of the retirement account are expected to be in the same or higher tax bracket than the current owner of the retirement account.
Here's how the strategy works. The current owner of the retirement account begins to initiate large Roth conversions over the course of a number of years to purposefully have those pre-tax retirement dollars taxed in a low to medium tax bracket. This way, when it comes time to pass assets to their beneficiaries, the beneficiaries inherit Roth IRA assets instead of pre-tax Traditional IRA and 401(k) assets that could be taxed at a much higher rate due to the requirement to fully liquidate and pay tax on those assets within a 10-year period.
In addition to lowering the total income tax paid on those pre-tax retirement assets, this strategy can also create multi-generational tax-free wealth, reduce the size of an estate to save on estate taxes, and reduce future RMDs for the current account owner.
10-Year Rule for Non-Spouse Beneficiaries
This tax strategy surfaced when the new 10-Year Rule went into place with the passing of the Secure Act. Non-spouse beneficiaries who inherit pre-tax retirement accounts are now required to fully deplete and pay tax on those account balances within a 10-year period following the passing of the original account owner. In many cases when children inherit pre-tax retirement accounts from their parents, they are still working, which means that they already have income on the table.
For example, if Josh, a non-spouse beneficiary, inherits a $600,000 Traditional IRA from his father when he is age 50, he would be required to pay tax on the full $600,000 within 10 years of his father passing. But what if Josh is married and he and his wife still work and are making $360,000 per year? If Josh and his wife do not plan to retire within the next 10 years, the $600,000 that is required to be distributed from that inherited IRA while they are still working could be subject to very high tax rates since the taxable distribution stacks on top of the $360,000 that they are already making. A large portion of those IRA distributions could be subject to the 32% federal tax bracket.
If Josh’s father had started making $100,000 Roth conversions each year while both he and Josh’s mother were still alive, they could have taken advantage of the 22% Federal Tax Bracket I in 2025 (which ranges from $96,951 to $206,000 in taxable income). If they had very little other income in retirement, they could have processed large Roth conversions, paid just 22% in federal taxes on the converted amount, and eventually passed a Roth IRA on to Josh. Utilizing this strategy, the full $600,000 pre-tax IRA would have been subject to the parent’s federal tax rate of 22% as opposed to Josh’s tax rate of 32%, saving approximately $60,000 in taxes paid to the IRS.
Tax Free Accumulations For 10 More Years
But it gets better. By Josh’s parents processing Roth conversions while they were still alive, not only is there multigenerational tax savings, but when John inherits a Roth IRA instead of a Traditional IRA from his parents, all of the accumulation within that Roth IRA since the parents completed the conversion, PLUS 10 years after Josh inherits the Roth IRA, are completely tax-free.
Multi-generational Tax-Free Wealth
If you are a non-spouse beneficiary, whether you inherited a pre-tax retirement account or a Roth IRA, you are subject to the 10-year distribution rule (unless you qualify for one of the exceptions). With a pre-tax IRA or 401(k), not only is the beneficiary required to deplete and pay tax on the account within 10 years, but they may also be required to process RMDs (required minimum distributions) from their inherited IRA each year, depending on the age of the decedent when they passed away.
With an Inherited Roth IRA, the account must be depleted in 10 years, but there is no annual RMD requirement, because RMDs do not apply to Roth IRAs subject to the 10-year rule. So, essentially, someone could inherit a $500,000 Roth IRA, take no money out for 9 years, and then at the end of the 10th year, distribute the full balance TAX-FREE. If the owner of the inherited Roth IRA invests the account wisely and obtains an 8% annualized rate of return, at the end of year 10 the account would be worth $1,079,462, which would be withdrawn completely tax-free.
Reduce The Size of an Estate
For individuals who are expected to have an estate large enough to trigger estate tax at the federal and/or state level, this “Next Gen Roth Conversion” strategy can also help to reduce the size of the estate subject to estate tax. When a Roth conversion is processed, it’s a taxable event, and any tax paid by the account owner essentially shrinks the size of the estate subject to taxation.
If someone has a $15 million estate, and included in that estate is a $5 million balance in a Traditional IRA and that person does nothing, it creates two problems. First, the balance in the Traditional IRA will continue to grow, increasing the estate tax liability that will be due when the individual passes assets to the next generation. Second, if there are only two beneficiaries of the estate, each beneficiary will have to move $2.5 million into their own inherited IRA and fully deplete and pay tax on that $2.5M PLUS earnings within a 10-year period. Not great.
If, instead, that individual begins processing Roth conversions of $500,000 per year, and over a course of 10 years can fully convert the Traditional IRA to a Roth IRA (ignoring earnings), two good things can happen. First, if that individual pays an effective tax rate of 30% on the conversions, it will decrease the size of the estate by $1.5 million ($5M x 30%), potentially lowering the estate tax liability when assets are passed to the beneficiaries of the estate. Second, even though the beneficiaries of the estate would inherit a $3.5M Roth IRA instead of a $5M Traditional IRA, no RMDs would be required each year, the beneficiaries could invest the Inherited Roth IRA which could potentially double the value of the Inherited Roth IRA during that 10-year period, and withdraw the full balance at the end of year 10, completely tax free, resulting in big multi-generational tax free wealth.
The Power of Tax-Free Compounding
Not only does the beneficiary of the Roth IRA benefit from tax-free growth for the 10 years following the account owner's death, but they also receive the benefit of tax-free growth and withdrawal within the Roth IRA, as long as the account owner is still alive. For example, if someone begins these Roth conversions at age 70 and they live until age 90, that’s 20 years of compounding, PLUS another 10 years after they pass away, so 30 years in total.
A quick example showing the power of this tax-free compounding effect: someone processes a $200,000 Roth conversion at age 70, lives until age 90, and achieves an 8% per year rate of return. When they pass away at age 90, the balance in their Roth IRA would be $932,191. The non-spouse beneficiary then inherits the Roth IRA and invests the account, also achieving an 8% annual rate of return. In year 10, the Inherited Roth IRA would have a balance of $2,012,531. So, the original owner of the Traditional IRA paid tax on $200,000 when the Roth conversion took place, but it created a potential $2M tax-free asset for the beneficiaries of that Roth IRA.
Reduce Future RMDs of Roth IRA Account Owner
Outside of creating the multi-generational tax-free wealth, by processing Roth conversions in retirement, it’s shifting money from pre-tax retirement accounts subject to annual RMDs into a Roth IRA that does not require RMDs. First, this lowers the amount of future taxable RMDs to the Roth IRA account owner because assets are being shifted from their Traditional IRA to Roth IRA, and second, since RMDs are not required from Roth IRAs, the assets in that IRA are allowed to continue to compound investment returns without disruption.
About Michael……...
Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.
IRS Gifting Rules: Tuition vs. Student Loan Payments
Helping a family member pay for education? Make sure you're on the right side of the IRS.
Whether you're covering K–12 tuition, writing checks for college, or assisting with student loans after graduation, the tax treatment of those payments isn’t always intuitive. The IRS draws a clear line between direct tuition payments and student loan contributions—and crossing that line could mean triggering gift tax rules you didn’t anticipate.
As the cost of college and private school continues to rise, it's increasingly common for extended family members—not just parents—to want to assist with the cost of tuition or student loan payments after graduation. However, many of those family members are surprised to learn that there are different gift tax and tax reporting rules that are dependent upon whether a direct tuition payment is made versus just helping with student loan payments post-graduation.
Tuition Payment Gift Exclusion
Because there are different gift tax rules that apply when making a tuition payment on behalf of someone else versus making a student loan payment for someone else, we will start with the tuition payment scenario first. Oddly enough in the eyes of the IRS, when someone makes a tuition payment for another person, the IRS does not view it as a “gift”. However, if that same person instead decides to help a family member pay off their student loans, the IRS views that action as a “gift”. So, when we have grandparents who want to help their grandchildren pay for college, we often advise them to provide their support as tuition payments directly to the college as opposed to allowing their grandchild to take the student loans and then assisting them in repaying the student loans after they have graduated.
As long as the tuition payment is made directly to the college from the family member, it does not constitute a gift, and gifting limits do not apply. However, if the money is not remitted directly to the college, then the gifting rules do apply. Sometimes, family members make the mistake of giving money directly to the student or the parents of the student to make the tuition payments; if that happens, they have now made a gift and must follow the gift tax and reporting rules.
What about tuition for a K-12 private school? The tuition gift exclusion also applies to tuition payments for preschool and K-12 private schools.
Another important note, the gift exception only applies to tuition. It is not extended to room and board. If a non-parent pays for the room and board on behalf of a student, it is considered a gift.
Student Loan Payment Gift Tax Rules
When someone makes a loan payment on behalf of someone else, the IRS considers that a gift. This is true whether the money is given to the individual and then they make the loan payment, or if payments are made directly to the loan servicer on behalf of the college student / graduate. As mentioned earlier, there are gift reporting rules and potential gift tax implications that the individual making the gift or loan payment needs to be aware of.
Annual Gift Exclusion
For 2025, the annual gift exclusion amount is $19,000, which, for purposes of this article, means any one person can make a student loan payment for someone else up to $19,000 per year without having to worry about filing a gift tax return or paying gift tax. The number of people to whom the annual gift exclusion amount is applied is infinite, meaning if a grandparent has 3 grandchildren, and they all have student loans, a single grandparent could make student loan payments up to $19,000 for EACH grandchild, and they are completely covered by the annual gift exclusion. No action needed.
If there are two grandparents, you can double the exclusion per grandchild to $38,000, since they each have a $19,000 annual gift exclusion.
For example, Jen graduated from college with $35,000 of student loan debt; her 2 grandparents would like to pay off the $35,000 on her behalf by sending a check directly to the servicer of the student loan. Since the amount is under the $38,000 joint filer gift exclusion amount, a gift tax return does not need to be filed, and no gift taxes are due.
If instead Jen had $50,000 in student loan debt, we might advise her grandparents to remit the max gift amount this year ($38,000) and then as soon as we flip into January of the next tax year, they can remit the remaining amount ($12,000) which is also under the annual exclusion limit since it resets each year.
Gifting Over the Annual Exclusion Amount
If a student loan payment is made on behalf of a family member that exceeds the annual gift exclusion amount, a gift tax return would need to be filed in the tax year the student loan payment was made. This, however, does not mean that gift tax is due.
The IRS provides a “lifetime gift tax exclusion” amount of $13.9 million per tax filer, meaning each person would have to gift over $13.9 million during their lifetime before any gift tax is due. For a married couple, double that to $27.8 million. Thus, only the ultra-wealthy typically have to worry about paying gift tax.
Be aware that state gifting limits can vary from the federal limits, so depending on what state you live in, you may or may not owe gift tax at the state level.
While gift tax may not be due on the student loan payment that is made, just remember that if the student loan payment exceeds the annual gift exclusion amount, a gift tax return still needs to be filed.
No Tax Impact For The Person Receiving The Gift
When a cash gift is made or a student loan payment is made on behalf of someone else, the person with the student loans in their name or the recipient of the gift does not incur a tax event. It’s a tax-free event for the recipient. If gift tax is triggered, it is paid by the person making the gift, not the person who benefited from the gift.
Estate Planning Strategy
There are a number of estate planning strategies that can be implemented, acknowledging these gift tax rules.
For individuals looking to shrink the size of their estate – either to avoid estate taxes or just to begin gifting to family members - tuition payments offer a unique advantage. Since direct tuition payments do not count as gifts, this opens up the ability to make tuition payments directly to a pre-school, K-12 private school, or college that are in excess of the $19,000 annual gift exclusion amount in an effort to shrink the size of the estate or avoid the headache of the gift tax filing process.
If you want to make a gift to your child, grandchild, or other family member, but you do not want to give them the cash directly, making a payment directly to the student loan service provider can ensure that the gift is used towards the outstanding student loan balance, but it is still subject to the gift tax and reporting requirements.
What if you have some family members who have student loans, but others do not, and you want to gift equally? Option 1: Give each family member a check for the annual gift exclusion amount and tell them they can do whatever they want with the cash, apply it toward a student loan, fund a Roth IRA, down payment on a house, etc. Option 2: You can send payments directly to the loan service provider for the family members who have student loans and make direct gifts to the family members without loans. All personal preference.
About Michael……...
Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.
