Suppose you are single and want to leave your investment account to a good friend, a relative or someone who has taken care of you as you age. You can set up the accounts as a “joint tenants with rights of survivorship” account (JT/WROS) but that could complicate your friend’s tax life. So you set up your account to pass to your friend at your death by designating your account as a TOD account.
A TOD account works much like an IRA beneficiary designation. The account transfers to your beneficiary at your death outside of the probate process, which can sometimes be lengthy and possibly costly (in terms of legal fees, not probate fees). The TOD beneficiary can be anyone, occasionally a spouse, often a child or sometimes a friend. It is a simple, free alternative to setting up a trust to bypass probate.