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The limits of transfer on death account designations

For many people, concern about their family's financial well-being is the primary motivator for creating an estate plan. Particularly for those who do not have a legal or biological tie to the individuals they love the most, an estate plan is necessary to protect their intentions for who receives which assets.

When someone dies without a will, the state of Colorado has a very specific manner in which it handles the intestate estate. Assets typically pass to a spouse first, then to children and then to other close family members.

Creating an estate plan is usually the best way to ensure that people know your wishes and follow them with regard to your assets after your death. However, some people prefer to rely on having accounts transfer to their intended beneficiary at the time of their death.

Transfer on death accounts have many limits

Whether the account was pre-existing or you knew you wanted to create a transfer order when you opened it, the transfer on death order effectively allows the financial institution to pass the contents of the account onto someone else even if they didn't have access to the funds inside while you were alive. People can use transfer on death designations for bank accounts, checking accounts and investment accounts.

However, there are often issues with the order to transfer an account, particularly when individuals do this with the remainder of their retirement account. First of all, the transfer on death order could violate the rights of a spouse or child to the estate of the deceased under Colorado state law.

Secondly, transferring all assets to someone before an estate goes through probate could mean that creditors don't receive adequate repayment. That could cause a financial and legal headache for the beneficiary or recipient of the account in the future. Finally, there is also the risk of the other party dying at the same time as you, leaving the funds potentially vulnerable to seizure by the state if there are no other heirs to claim them.

Designating a transfer won't serve the same purpose as creating a will

Choosing to transfer a few of your accounts directly to someone other than your spouse at the time of your death may be one way to streamline your estate plan. However, those transfer designations should never be the only protection in place for your assets or loved ones.

You should have a comprehensive estate plan that includes the last will and even potentially a trust to ensure the proper disbursement of your assets. You can use a combination of transfer on death accounts and comprehensive estate planning to create the best potential protections for you and the people you love.

Talking with an attorney can help you make better decisions about your finances and estate plan. Your lawyer can advise you if your wishes could potentially violate state law, leading to the probate courts undoing your transfer designation. An attorney can also help you create a thorough estate plan or update your existing one to give you peace of mind and help protect your legacy.

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