7 Things You Need To Know About Transfer On Death Accounts

Transfer-on-death (TOD) accounts are one of the most practical and underused tools in estate planning. They allow you to name a beneficiary for financial accounts and, in New Mexico, even real estate, so those assets pass directly to your chosen person at death without going through probate court.

Used thoughtfully, a TOD designation saves your family time, money, and paperwork. Used carelessly, it can create exactly the kind of disputes and complications you were trying to avoid. This guide covers how TOD accounts work, what New Mexico law allows for real property, and the situations where a TOD designation is not the right answer on its own.

What Is a Transfer-on-Death Account?

A transfer-on-death account is a financial account — a brokerage, bank, or investment account, or similar asset — that carries a beneficiary designation. Upon the account holder’s death, ownership of the account transfers automatically to the named beneficiary. The beneficiary presents a death certificate to the financial institution, and the account is re-registered in their name. No court involvement, no waiting for probate to close.

TOD is also used as a broader term for real estate transfers in states that allow it. New Mexico is one of them — and the rules for real property are meaningfully different from the rules for financial accounts. Both are covered below.

7 Things to Know About TOD Accounts

1. They Bypass Probate — For That Asset Only

The primary benefit of a TOD designation is probate avoidance. Assets with a valid TOD designation transfer directly to the named beneficiary outside of the probate process, saving time and reducing legal costs.

This does not mean that a TOD designation removes all complexity from an estate. Only the specifically designated account bypasses probate. Everything else — real estate without a deed designation, vehicles, personal property, accounts without beneficiaries — still flows through your estate and, if there is no will, through New Mexico’s probate process. A TOD account is a useful tool, not a complete estate plan.

2. Beneficiary Designations Override Your Will

This is the most important thing to understand about TOD accounts: the beneficiary designation controls, not your will. If your will says your estate goes equally to your three children, but your brokerage account has a TOD designation naming only one of them, that one child receives the entire brokerage account. The will has no effect on that asset.

This creates serious problems when estate plans are updated, but beneficiary designations are not reviewed. Divorce, remarriage, the death of a named beneficiary, or changes in family circumstances can all make an old TOD designation the wrong one — and it will still be honored unless you change it while you are alive and mentally competent.

3. Multiple Beneficiaries Are Allowed — With Percentage Splits

You can name more than one beneficiary on a TOD account and specify what percentage each person receives. You can also name contingent beneficiaries — people who receive the assets only if the primary beneficiary predeceases you. Naming contingent beneficiaries is strongly recommended, because if a primary beneficiary dies before you and you have not updated the designation, the account may fall into your probate estate anyway.

4. The Account Is Still Part of Your Taxable Estate

TOD accounts bypass probate, but they do not reduce your taxable estate. The full value of a TOD account is includible in your gross estate for federal estate tax purposes. This is different from certain trust structures, which can remove assets from the taxable estate entirely.

One notable tax benefit: TOD accounts receive a full step-up in cost basis at death. This means your beneficiary inherits the account at its fair market value on the date of your death, which eliminates any capital gains that accrued during your lifetime. For accounts with significant unrealized gains, this can be a meaningful benefit compared to gifting the account during your lifetime.

For a full picture of how TOD accounts interact with federal estate tax planning, see our overview of New Mexico inheritance and estate tax.

5. Creditors Can Still Reach TOD Accounts

Bypassing probate does not mean bypassing your debts. If there are insufficient probate assets to pay your estate’s debts, creditors may be able to make a claim against TOD accounts and other non-probate assets. Your beneficiary could be required to contribute up to the value of what they received to satisfy those obligations.

This is less of an issue for modest estates without significant debt, but for anyone with business liabilities, outstanding judgments, or potential medical debt, the interaction between TOD accounts and estate creditors is worth discussing with an attorney.

6. Naming Minors or Disabled Beneficiaries Requires Additional Planning

You can name a minor child or a person with a disability as a TOD beneficiary, but doing so without additional planning almost always creates problems. A minor cannot legally receive assets directly — a court will appoint a guardian to manage the funds until they reach adulthood, which is exactly the kind of court involvement you were trying to avoid. A person with a disability who receives assets directly may lose eligibility for Medicaid, SSI, or other government benefit programs.

The right approach in both cases is to direct the assets into a trust established for that beneficiary’s benefit, rather than naming them directly. An estate planning attorney can help structure this correctly.

7. TOD Designations Must Be Kept Current

A beneficiary designation is only as good as its last update. Life changes constantly — marriages end, people predecease you, family circumstances shift — and the administrative task of reviewing beneficiary designations across all accounts is one that most people put off far too long. Every financial account with a TOD or POD designation should be reviewed whenever there is a major life event and, at a minimum, every 3 to 5 years alongside the rest of your estate plan.

TOD vs. POD vs. Beneficiary: What Is the Difference?

These three terms are closely related and often used interchangeably, but they are not identical.

TOD (Transfer-on-Death) is typically used for brokerage accounts, investment accounts, and securities. Account ownership transfers to the named beneficiary upon the account holder’s death. It is also the term used for real estate deed designations in states like New Mexico that allow them.

POD (Payable-on-Death) functions the same way but applies to bank accounts — checking accounts, savings accounts, money market accounts, and CDs. The account pays out its balance to the named beneficiary at death. Some financial institutions use the two terms interchangeably.

Beneficiary designation is the broader term that encompasses both. It also applies to life insurance policies and retirement accounts (IRAs, 401(k)s), which each have their own beneficiary forms, regardless of whether the account holder sets one up separately. Retirement accounts have additional rules regarding required distributions for non-spouse beneficiaries, making them a distinct planning consideration.

All three operate the same way in one critical respect: the designation controls over any instructions in your will.

New Mexico Transfer-on-Death Deeds: Passing Real Property Without Probate

New Mexico allows property owners to use a transfer-on-death deed (TODD) to pass real estate directly to a named beneficiary at death, bypassing probate entirely. This is governed by the Uniform Real Property Transfer on Death Act (NMSA 1978, §45-6-401 et seq.), which New Mexico adopted in 2013.

A TODD works differently from a TOD account designation in several important ways. Here is what New Mexico property owners need to know.

The deed must be recorded before death. A TODD that is not recorded at the county clerk’s office before the owner dies has no legal effect. It does not matter that it was signed and notarized — if it was not recorded in the county where the property is located before death, the property will go through your estate instead. Recording fees are approximately $25.

The TODD controls your will. Just as a TOD account designation overrides your will, a recorded TODD overrides your will. If your will leaves your house to your children equally, but your recorded TODD names only one child, the TODD governs. You cannot revoke a TODD through your will.

Revocation requires its own recorded document. To revoke a recorded TODD, you must either record a revocation form, record a new TODD for the same property, or record a deed that expressly revokes it. Destroying the original document does nothing once it has been recorded.

Beneficiaries take the property subject to existing liens. The property transfers to your beneficiary exactly as it exists at your death — including any mortgages, liens, or encumbrances. The beneficiary inherits both the property and whatever debt is attached to it.

Community property rules apply. New Mexico is a community property state. If a married couple owns property jointly and one spouse records a TODD, the deed only affects that spouse’s interest. If one joint tenant dies before the last joint tenant, the surviving joint owner becomes the sole owner first; the TODD beneficiary only receives the property after the last joint owner dies.

Medicaid considerations. A TODD removes your real estate from your probate estate but not from your taxable estate. Importantly, New Mexico Medicaid is in the process of stepping up estate recovery procedures, and TODD property may be reachable by Medicaid to recover costs paid during the owner’s lifetime. For anyone receiving or likely to receive Medicaid benefits, this is a significant consideration and worth discussing with an attorney before recording a TODD.

Notifying your beneficiary is recommended but not required. New Mexico law does not require you to tell the named beneficiary about the TODD. However, the State Bar of New Mexico’s Legal Resources for the Elderly Program notes that secrecy can cause complications and make fraud easier. The beneficiary should know the deed exists and understand what they need to do to claim the property — presenting a certified copy of the death certificate at the county clerk’s office in the county where the property is located.

What We Typically See: Common TOD Mistakes in New Mexico Estates

After working with New Mexico families on estate planning and probate matters, a few patterns have come up repeatedly with TOD designations.

Outdated designations that nobody caught. A divorced spouse who is still named as a TOD beneficiary on a brokerage account is one of the most common and avoidable problems we see. In New Mexico, divorce does not automatically revoke a TOD designation, the way it can affect a will in some states. If you do not update the form, a former spouse may legally receive the account.

Minor children are named directly. Parents often intuitively name their children as TOD beneficiaries without realizing that a minor cannot receive assets directly. The result is a court-supervised guardianship of the funds, with annual reporting requirements, until the child turns 18 — at which point the full amount is distributed outright with no conditions, regardless of the child’s maturity or circumstances.

A TODD recorded only days before death. Families sometimes rush to record a TODD when a loved one becomes seriously ill. While this is legally valid as long as it is recorded before death, deeds executed and recorded under these circumstances are sometimes challenged by other heirs. A well-executed, properly planned TODD recorded years in advance is far less vulnerable to a challenge than one recorded in the final weeks of someone’s life.

TOD accounts that conflict with trust provisions. We regularly work with families whose trust-based estate plans were carefully drafted, but individual financial accounts were never updated to align with the trust. The trust directs assets one way; the TOD designations direct them another. The TOD designations win, and the plan the family thought they had never actually existed.