Ever thought about placing some of your key assets in instruments that bypass the probate process? In a number of states, homeowners have the option of placing their real estate in a transfer on death deed. Think of a retirement account that’s transferred to its designated beneficiary on death. In the same way, with a transfer on death deed for real estate, a home can pass to a designated person, people, or a charity automatically upon the current owner’s death.
Depending on location, the transfer on death deed might be called a beneficiary deed or a deed upon death. As of 2020, the majority of states are now allowing these deeds—although the forms, details, and limitations on the size and kind of property will vary among those states. The property must be in a state that allows the transfer on death deed. Find out more about applicable requirements by selecting the state where your home is located.
Of course, having a joint owner on the title with survivorship rights already enables a surviving spouse to bypass probate. Real estate titled with rights of survivorship passes to the surviving owner, and the will doesn’t apply to it. So, what makes the transfer upon death deed a different form of non-probate conveyance? It means the owner doesn’t have to add someone to the deed. Therefore:
- Using a transfer on death deed allows the owner to keep complete ownership of the property and control all financial decisions related to it.
- Because a TOD deed is not part of its creator’s will, a spouse has no claim to it.
The transfer on death deed conveys no interest at all while the owner is alive, and can be revoked at any time.
A New Legal Instrument
In 1989, Missouri introduced this probate-free real estate deed as a simple way for an owner to leave real property to a family member, life partner, friend or nonprofit—without the need to establish a trust. It caught on. Kansas adopted the idea in 1997. Ohio, Arizona and New Mexico would soon follow, and many more states have since joined the trend. Homeowners appreciate several aspects of this new instrument:
- Once it’s filed, it’s off the to-do list. An owner can create the instrument now, record it, and the conveyance will be taken care of. No potential problems involving lost wills or questionable codicils after the owner passes away.
- It passes along the homestead exemption, which many states offer taxpayers. The homestead exemption applies to beneficiaries who accept the home as their primary residence.
- It allows for a stepped-up cost basis. If the beneficiary later sells the property, just as with an inheritance, any capital gains are assessed from the value at the time of original owner’s date of death—not from back when the deceased owner first took title.
- It might be available to put property into a trust after death. Check state law, as not all states allow this move.
These perks notwithstanding, not all states have absolute confidence in this trend. California is approaching the end of a 5-year test run. Until California lawmakers renew the law, the current availability of transfer on death deeds will expire on the last day of 2020. (An already made deed will remain valid.)
Why the caution? What trouble could a beneficiary deed cause?
- Elder abuse concerns. The beneficiary deed is short, simple, and cheap to record. This could tempt potential beneficiaries to use the deed to press elder owners into transferring the home.
- Insurance issues. Some insurance companies will hold off issuing policies for homes transferred by deeds on death, making the home impossible for a beneficiary to sell right away.
- Delays. Homes transferred through beneficiary deeds can have debts to clear up, and creditors have an extended time to make claims. Example: Nevada gives creditors 18 months to reach the value of a home transferred by a deed upon death.
An owner whose state allows beneficiary deeds should be sure to resolve any mortgages, loans or contractors’ agreements, so claims do not outlive the owner to burden the beneficiary. And although it’s not mandatory, it is a good idea to tell the beneficiary about the potential conveyance—and all the more so if they may end up with new responsibilities along with the benefit.
How to Create the Transfer on Death Deed
The key is the recording process. To have any legal meaning, the deed must be recorded before the owner’s death, under the rules of the property’s county. The county recorder of deeds will charge a fee to date-stamp and record the deed. The recording does not transfer the property yet, and filing the deed is not a taxable event. The general process goes like this:
Fill out the transfer on death deed form for your state. The document must have the necessary elements to follow the state’s law, typically directing that the property is transferred upon the owner’s (grantor’s) death and including the name and address of the current owner; the grantee beneficiaries’ names; the legal description of the property, and proper formatting. Note: Deeds.com transfer on death deed forms are formatted to meet the requirements in your jurisdiction.
Following state witness and notary requirements, sign the document with a notary, so that the document has a notary seal and signature.
Be sure the recording is timely. For example, California requires recording within 60 days from the date it is signed. Do not expect the recorder’s office to check the filing for mistakes.
Revoke the deed if your plan for the property changes. Do this by recording a notice of revocation as guided by state law. If you convey the house to someone else during your lifetime, the transfer on death deed becomes void.
Pro tip: If you ever become incompetent, you lose the power to revoke a transfer upon death. But if you have assigned someone the power of attorney over your real estate, that party can sell or transfer your home on your behalf.
How a Transfer on Death Deed Takes Effect
The deed legally transfers the title to the beneficiary upon its creator’s death, when:
- The personal representative of the estate sends the homeowner’s death certificate to the county recorder.
- The personal representative files the affidavit of death of the owner and change in ownership statement with the county assessor in the time frame set forth by state law. For example, in Sacramento County, CA, the personal representative submits the Change in Ownership Statement Death of Real Property Owner to the Sacramento County Assessor, accompanied by a copy of the owner’s death certificate, within 150 days of the death, or when the estate’s inventory is filed in the probate court.
- The beneficiary pays any applicable real estate transfer tax.
How Co-Owners Can Use a Transfer on Death Deed
A transfer on death is particularly useful for the single owner whose home is the person’s key asset. It’s simpler than creating a living trust. That said, it can also be created by co-owners who prefer it to a will or trust. So, you might ask, can we call the deed creators “we” instead of “I”? Yes, if the state law that controls your real estate expressly permits this. Nevada, for example, directs the owners to “substantially” follow a sample form that begins “I (We) [name(s)] hereby convey to [name(s) of beneficiary or beneficiaries], effective on my (our) death…” Both marriage partners or co-owning joint tenants must sign the transfer on death deed to convey the full interest in the property.
Parents with joint ownership can use this method to convey the house to their children, specifying, for example, that multiple children would take the property with a certain form of titling. (Here is more on the difference between the deed and the titling of real property.) Clearly state on the deed who the beneficiaries are. Rather than saying “my children” use their names.
The deed has no legal meaning until both co-owners pass away. When one dies, the surviving spouse can still revoke the deed. Once the second spouse dies, the named beneficiary must still be alive to keep the deed probate-free. Yet the instrument can, and should, name alternate beneficiaries, in case the owners outlive the beneficiary, or in case the designated beneficiary refuses the deed.
Note: If multiple people are named on the deed as its primary beneficiaries and only one of them survives the deed creator(s), that survivor will receives the whole interest in the entire property.
A Good Deed—in the Right Circumstances
The transfer on death deed, where available, lets a homeowner pass a house along to another person without giving up control now, and without leaving the transfer process to the probate court. On the other hand, the transfer on death deed is not a warranty deed, and can pass encumbrances from one owner to the next.
Senior homeowners can keep their standard tax benefits while using this instrument. Yet there can be important, complex, and changing tax implications in the choice between using a beneficiary deed and setting up a trust. To avoid potential pitfalls, consult a reputable accountancy firm and local real estate law expert.
This kind of transfer can make sense and do what it’s meant to do—avoid probate—if the owner makes no changes to the ownership after filing the deed, and as long as the beneficiary survives and accepts the deed.