Transfer on Death Deed: Second Thoughts?

Avoiding the probate courts is an important goal for some homeowners. That’s why the transfer on death deedhas achieved popularity. One by one, most states have now adopted the option.

Sometimes called the TOD deed, or just TODD, it offers a relatively simple way for a deed holder to say who’ll get the deed next. But before creating a TOD deed, you might review the pitfalls that have shown up in certain states. Then you can check your own state’s provisions against these.

What Issues Are Cropping Up With the TODD?

This new estate planning tool has a lot going for it, beyond just convenience. Unlike, say, the life estate deed, the TOD deed beneficiary gets no present property interest. So there’s no taxable gift. And no worries that the beneficiary’s debts will impact the creator of a TOD deed. The transfer on death can go to anyone, be it a relative or friend or charity.

But some advisers now alert clients to specific issues. Depending on the state, here are some common hitches to look for:  

• TOD deeds aren’t without formalities. The transfer document must be witnessed and notarized, and filed with the home’s county or city recorder of deeds. A TOD deed that was never recorded before death is useless.

• Also, recording a TOD (and any subsequent versions to revoke the first one) can cost hundreds of dollars in fees (although they may be well under the fees associated with probate).

• A TOD deed won’t work well if the named beneficiary would want to sell the home in the months immediately following the death of the owner. Check for the statutory waiting period.

• For seniors, using a TODD transfer won’t shield the home from debts related to long-term care or social services.

• It’s possible that a disabled TOD beneficiary could lose government benefits.

• If the beneficiary has died and the deceased didn’t name a backup beneficiary, the TOD is meaningless. The real estate will go through probate (not to the beneficiary’s heirs). If two children are named as beneficiaries and one has died, the deceased child’s family gets left out. 

• TOD deeds don’t always get around probate. This has surprised people, who expect that the beneficiary will automatically own the property when they pass away. But in many states, the title company will direct the home into probate—to ensure debts get paid—before releasing the home to the beneficiary.

On top of all that, title insurance can be hard to get. The title company will at least want proof that no undue influence came into play, especially if the TOD creator was a senior at the time.

These are just a few of the snags that beneficiaries have run into, depending on the state. So, check the law on “beneficiary deeds for real estate” in the state where the home is.

A Few Final Points to Keep in Mind

If the deed is held by joint owners with survivorship rights, the TOD deed will not work. The property will instead transfer to the surviving joint owner, who may then revoke the TOD.

Also, if you’re naming more than one person as a beneficiary, the TODD might backfire after you pass. There’s nobody (like the trustee for a trust) who’s the decision-maker. It’s not hard to imagine the disagreements that could crop up between your children later.

Could there be a better way to avoid probate? To find out, contact a local estate planning lawyer. A set of trained eyes could help spare your loved ones from surprises and pitfalls. Alternatives that could work much better in the long run include a living (revocable) trust. A professional adviser can explain how best to include protections addressing disability, divorce, debts, and changes in healthcare needs.