What is the difference between a TOD account and a trust?

On Behalf of | Aug 15, 2022 | Estate Planning

Planning for the future by creating an estate plan is something that can benefit all Michigan residents. If you wish to protect certain property from probate, two options you can turn to are a transfer on death account or a revocable trust. Knowing the differences can help you decide which one is better for you.

What is a transfer on death account?

A transfer on death (TOD) account gives you the ability to name a beneficiary who will receive a financial account upon your death. TOD accounts let you bypass the probate process when you plan on leaving your account to a beneficiary. However, if the decedent owes debt to creditors, their creditors could try to collect on it through assets from the financial account. Taxes owed on the estate must also be paid as well. These funds could be deducted from the account in spite of the assets going to the beneficiary. The beneficiary is also at risk of a collection lawsuit if they do not voluntarily contribute.

What is a revocable trust?

A revocable trust allows you to hold assets for beneficiaries while avoiding probate as well. It also lets you plan for your future in the event that you become incapacitated. You can also create special types of trusts for minor children or loved ones who are mentally or physically disabled to protect them in the future.

A trust can also be used to pay for debts and taxes, which allows beneficiaries to be spared from being asked to contribute to those obligations.

How do TOD accounts and revocable trusts differ?

While both TOD accounts and revocable trusts can both protect assets from going through probate upon the creator’s death, a revocable trust can do much more. The only major benefit of a TOD account is that it can bypass probate.

Both of these estate planning options are appropriate, but it’s important to weigh the benefits of each when choosing one over the other.