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<<I'm doing my estate planning, and looking for ways to avoid probate costs for my heirs. Most of my assets are individual stocks held at one brokerage.>>

Then consider getting some help from a qualified estate planning pro. I'm not trying to be flip here, but estate planning is really not something that you want to try and do yourself. Just my opinion.

<<Of course a revocable living trust is one probate avoidance tool.>>

One of the very best.

<< But I've just become aware of another tool which is easier, less expensive (free, in fact), and seems to fit my situation perfectly--the transfer on death (TOD), sometimes referred to as the pay on death (POD) beneficiary designation.>>

Yup...that'll certainly work as I understand it. The POD designation names a beneficiary (thereby avoiding probate) but gives the beneficiary no interest in the account until your passing.

<<Many banks and investment companies, including my broker, allow account holders to sign a TOD form designating beneficiaries to receive the assets immediately upon the death of the account holder--completely avoiding probate.>>

Right. Again, it's really not estate planning per se, but more along the lines of avoiding probate planning. They are really two different issues.

<<Question 1 - Would using the TOD method affect the stepped up cost basis of my stocks? In other words, would my heirs' cost basis still be stepped up to the fair market value on my date of death, as it would if they inherited the stocks through my will?>>

I believe that the answer is yes. The value of the shares will still remain in your estate. They will simply pass directly to the beneficiaries directly.

<<Question 2 - Are there any other pitfalls to the TOD designation? (It seems almost too good to be true--like a free lunch.)>>

If you have a number of beneficiaries, it could be a problem. If you have three beneficiaries, you might want to have three different brokerage accounts (if the beneficiaries aren't going to share and share alike in the assets). If you have children from a prior marriage and a current spouse, the POD designation might shut out your current spouse from some needed income during her life that will pass directly to the beneficiaries. A properly drawn trust could solve that problem.

<<BTW, I am aware that avoiding probate doesn't have any effect on estate taxes. That's a whole other can of worms.>>

Right you are. I really hate to see usage of POD accounts other than for the most elementary of estate circumstances. And not too many of those exist. The POD will solve your probate problems, but might cause additional heartache from an estate tax planning standpoint.

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