Transfer On Death

Ingrid Solvang named her brother as the sole beneficiary of her traditional IRA when she opened it. Five years later she signed a will leaving "all of my retirement assets" to her daughter. Ingrid dies with the original beneficiary form still on file at the custodian. Who receives the IRA?

1. A.Her brother, because the beneficiary designation on file controls and the IRA passes outside the probate estateCorrect. The custodial beneficiary form is a contract that bypasses the will and probate.
2. B.Her estate, because the conflict voids the beneficiary designation and forces the IRA through probateThe designation is not voided by an inconsistent will, so the IRA never enters probate.
3. C.Her daughter, because the will is the later document and expressly covers retirement assetsA will cannot override a valid beneficiary designation on a retirement account.
4. D.Her brother and daughter equally, since the two documents conflictThere is no default splitting rule; the beneficiary form governs outright.

Why: A valid beneficiary designation on file with the IRA custodian is a contract with the custodian. The account passes directly to the named beneficiary outside the probate estate, so the will does not redirect it no matter how recently it was signed. The lesson for representatives is to have customers review beneficiary forms after every major life event, because the will cannot fix a stale designation.

A customer registers her individual brokerage account with a transfer on death designation naming her niece as beneficiary. The customer's will, executed later, leaves her entire estate, without exception, to a different relative. Upon the customer's death, who receives the brokerage account assets?

1. A.The relative named in the later will, since a will executed after the account registration supersedes any earlier beneficiary designation.Wrong. A later will does not supersede a transfer on death designation, since those assets pass outside of probate.
2. B.The niece named in the transfer on death designation, since assets registered with that designation pass directly to the named beneficiary outside of probate and are not controlled by the terms of a will.Correct. Transfer on death assets pass outside of probate directly to the named beneficiary, unaffected by the will.
3. C.The assets are split evenly between the niece and the relative named in the will, since both documents reflect the customer's intent at different points in time.Wrong. There is no even split; the transfer on death designation alone controls these specific assets.
4. D.The assets pass to the state under escheatment procedures until a court resolves the conflict between the two documents.Wrong. There is no conflict requiring court resolution or escheatment; the transfer on death designation controls unambiguously.

Why: A transfer on death designation operates outside of probate, passing the designated assets directly to the named beneficiary by operation of the account registration itself, the same way a beneficiary designation on a retirement account or an insurance policy works. A later will has no effect on assets that pass this way, because those assets were never part of the probate estate the will actually controls -- the niece receives the account regardless of what the will says, unless the transfer on death designation itself is properly changed.

Cuthbert registers his individual mutual fund account transfer on death, naming his nine-year-old granddaughter Faustine as sole beneficiary. His representative should point out that:

1. A.A minor may not be named as a transfer-on-death beneficiaryA minor may be named. The complication is administering the assets after the owner death, not the naming itself.
2. B.The registration avoids probate but does not enable a minor to take title, so he should consider naming a custodian for her under the state transfers to minors act or directing the interest to a trustCorrect. TOD solves probate, not the incapacity of a minor to hold and manage securities.
3. C.Faustine acquires a present ownership interest that Cuthbert may not revokeA TOD beneficiary has no interest during the owner lifetime, and the designation can be changed at will.
4. D.On his death the shares pass to Faustine outright and she may redeem or exchange them immediatelyA minor cannot give a valid instruction on securities. An adult custodian or guardian must act for her.

Why: A transfer-on-death registration passes the account outside probate to the named beneficiary. It does not solve the separate problem that a minor cannot take legal title to and manage securities. If Cuthbert dies while Faustine is still a minor, a guardian or custodian will have to be appointed or designated before the assets can be administered - which is why funds and firms encourage naming a custodian for the minor under the state transfers to minors act, or directing the interest to a trust.