Non-Probate Assets and Litigation: When Transfer-on-Death Designations Become Lawsuits

Many people, without knowing so, have non-probate assets. For instance, many of us have bank accounts. That bank account may have a transfer-on-death (TOD) designation naming one child as the beneficiary. But what if the account holds $50,000 and the will states that the estate assets are split evenly among the four children? While this TOD designation makes asset transfers easier by avoiding probate, it can inadvertently cause problems. A family member might also dispute the validity of a designation, allege undue influence, or believe changes were made improperly. This can all lead to lawsuits, delaying resolution, and causing significant expense. Here is how to handle TOD designations to avoid litigation. 

What Are Non-Probate Assets?

Probate is the court-supervised legal process used to administer a person’s estate after death. During probate, a court validates the will, ensures that debts and taxes are paid, and oversees the distribution of remaining assets to beneficiaries. If there is no valid will, state law determines how the estate is divided. The process can take months or even longer.

Not all assets go through probate. Non-probate assets are property that passes directly to a beneficiary outside of the probate court system. These assets transfer automatically based on contractual arrangements or ownership structures rather than through a will.

Common examples include:

• Transfer-on-death (TOD) bank or investment accounts
• Payable-on-death (POD) bank accounts
• Life insurance policies with named beneficiaries
• Retirement accounts such as IRAs and 401(k)s
• Jointly owned property with rights of survivorship

What Does Transfer-On-Death Mean?

One common tool for avoiding probate is the TOD designation. These designations allow certain assets to pass directly to a named beneficiary without going through the court-supervised probate process.

A TOD designation is simple for anyone to set up. You usually just complete a form through your bank or financial institution and name the people you want to receive your assets. You still fully own and control your money and accounts while you are alive, so you can spend, withdraw, or manage them however you choose. You can also update the beneficiaries or make changes at any time if your situation changes.

For example, David names his daughter, Beth, as the TOD beneficiary of his savings account. During his lifetime, he continues to deposit and withdraw money as needed because he retains full control of the account. After David’s death, the remaining funds are transferred directly to Beth. 

Why Would Disputes Occur Regarding Transfer-On-Death Designated Assets?

While TOD and other non-probate assets are designed to simplify estate transfers and avoid probate, disputes can still occur. Here are some of the most common reasons why these disputes occur:

1. Conflicting estate planning documents

A major source of disputes happens when a TOD designation conflicts with a will or trust. For example, a will may state that assets should be divided equally among children, but a TOD form may name only one child as the beneficiary of a significant account. This inconsistency can lead to legal challenges over which document should control the distribution of assets.

2. Undue influence or pressure

Family members may allege that the account owner was pressured or manipulated into changing a beneficiary designation, especially in cases involving elderly or vulnerable individuals. If someone believes the change was not made freely or was influenced by another party, they may contest the TOD designation in court.

3. Lack of mental capacity

Disputes can also arise if there are concerns about the account holder’s mental capacity at the time the TOD designation was created or updated. If someone had dementia, cognitive decline, or was otherwise impaired, heirs may argue that the designation is invalid.

4. Family disagreements and perceived unfairness

Even when a TOD designation is legally valid, family members may still dispute it if they feel the outcome is unfair. For example, one child receiving a large account while others receive nothing can lead to emotional conflict and legal challenges, especially in blended families.

5. Improper execution or paperwork errors

Simple administrative mistakes can also lead to litigation. Missing signatures, unclear beneficiary names, outdated forms, or incorrect account references can create confusion and open the door for competing claims among potential heirs.

6. Changes made shortly before death

Last-minute changes to beneficiary designations often raise suspicion. If a TOD form is updated shortly before the account holder’s death, other heirs may question whether the change reflected true intent or external pressure.

How Do I Prevent Disputes Regarding TOD Designated Assets?

• Keep beneficiary designations consistent with the overall estate plan to avoid conflicts between wills and account forms.
• Review and update accounts after major life events such as marriage, divorce, births, or deaths to prevent outdated designations from controlling asset distribution.
• Ensure all beneficiary forms are properly completed, clearly written, and executed in accordance with financial institution requirements.
• Avoid making last-minute changes without clear documentation or legal guidance, as these changes are often challenged in litigation.
• Communicate estate planning intentions to family members when appropriate to reduce confusion and manage expectations.
• Regularly review all non-probate assets, including TOD, POD, life insurance, and retirement accounts, to ensure they still reflect current wishes.

Contact an Experienced Estate Planning Attorney 

Contacting an experienced estate planning attorney is an important step when using transfer-on-death (TOD) designations and other non-probate assets in your estate plan. These tools can be useful for passing assets directly to beneficiaries outside of probate, but they must be set up carefully to avoid mistakes or unintended conflicts. An attorney can help ensure that your beneficiary designations align with your overall estate plan and do not conflict with your will or trust. They can also advise you on potential risks, such as disputes among heirs or improper documentation. With proper guidance, you can use these strategies more effectively to protect your assets and reduce the chance of future litigation. Reach out to us today for immediate assistance.