Deciding how you want your assets and estate distributed on your death can be an emotional task. Analyzing the legal mechanisms to accomplish this task can be overwhelming and exhausting. You want to be sure your assets will be distributed in accordance with your final wishes, but you also do not want to burden your loved ones with a possibly lengthy and expensive court battle over your estate when they should be celebrating your life. Transfer on death deeds can be one of the instruments that you can use during this process.
What is a Transfer on Death Deed?
A Transfer on Death (“TOD”) deed can be an effective tool to use as part of your comprehensive estate plan. To better understand TOD deeds, it is necessary to first understand some legal terminology:
- A “deed” is a written, legal document, which transfers “title” in “real property” from one person to another.
- “Title” refers to ownership of a particular property; if you have title to a property, you own it. Therefore, you have the right to use that property or transfer it to someone else.
- “Real property” is generally used to describe immovable property. Immovable property is property that cannot be moved from one place to another. Real property includes any fixture above the land, such as a house, and anything below the land, such as minerals. “Real property” differs from “personal property,” which can include items such as jewelry, cars, and clothes. For most people, the real property to be distributed at their death is their home.
Transfer on Death Deed Definition
A TOD deed allows your real property to pass to the correct person or persons on your death with as little fuss as possible. A TOD deed names two separate parties: (1) the grantor, and (2) the beneficiary.
The grantor is the current owner of the property. The beneficiary is the individual the grantor designates to receive the property when the grantor dies. A beneficiary can be either an individual person, multiple people, or, in some states, an organization, such as a charity. A grantor may name alternate beneficiaries to receive the property should the primary beneficiary refuse the property or die before the grantor. A beneficiary has no legal right to the property while the grantor is alive. However, when the grantor dies, the property automatically passes to the beneficiary.
A TOD deed is similar to a payable-on-death (“POD”) designation for your bank account. However, instead of money in your bank account, real property transfers automatically on your death.
States with Transfer of Death Deeds
Below is a list of states that have currently some form of a TOD deed. A transfer of death deeds is also referred to as a beneficiary deed, TOD instrument, or deed upon death.
- District of Columbia
- New Mexico
- North Dakota
- Ohio (TOD affidavit)
- South Dakota
- West Virginia
Florida and Michigan have a similar instrument called an “enhanced life estate deed” or a “Lady Bird Deed.”
Creating a Transfer on Death Deed
State laws concerning TOD deeds vary. You will want to find a local attorney who understand the requirements in your state. Generally, a TOD deed is like any other real estate deed. A TOD must include: (1) the names of the grantor (you as the current property owner) and the grantee (the beneficiary or beneficiaries); (2) a legal description of the property; (3) the grantor’s signature; and (4) any required witness or notary. You should be specific in naming your beneficiary or beneficiaries. For example, if your beneficiaries will be your son and daughter, including their names, i.e. “John Doe” and “Jane Doe,” as opposed to “Grantor’s Children.” The TOD deed will also require specific language, which states that the transfer of property will automatically take effect on your death.
Because a TOD deed is a transfer of title on your real property, it must be properly recorded like any other transfer of title on real property. This is an important distinction between a TOD deed and a trust. Unlike a trust, which is neither recorded nor made public record, the TOD deed must be recorded in the public property records of the county in which your property sits before your death. To record the TOD deed, you (or your attorney if you have hired one) would take the original deed to the public records office for the county in which the property is located (usually the register/recorder of deeds or county clerk’s office) and pay a small fee. Generally, the clerk will stamp the deed with the date it was received, officially enter it in the county’s records, and return the original to you (or your attorney).
Revoking a Transfer on Death Deed
Revoking a TOD deed is relatively easy. You would follow the same steps outlined above but record new deeds. If you want to change beneficiaries, you simply record a new TOD deed with a different beneficiary. If you want to cancel the TOD deed, you must record a cancellation/revocation of the TOD deed.
Benefits of a Transfer on Death Deed
Below are a few reasons you might want to consider using a TOD deed:
A probate court is responsible for administering a deceased person’s estate (if the person died without a will) or a deceased person’s will. “Probate,” as it is often referred, can sometimes be a lengthy and expensive process, and many people try to avoid it. A TOD deed avoids probate because the real property automatically passes to the beneficiary on the grantor’s death, avoiding the court system altogether.
Easy to Revoke
One of the greatest benefits a TOD deed provides to a grantor is flexibility because it does not give the beneficiary a present legal or equitable interest in the property. The interest given to the beneficiary is a potential future interest that you can revoke at any time before your death. Additionally, you are not required to notify your beneficiary that you are either naming them as a beneficiary or revoking their beneficiary status.
Retain Complete Ownership
As the current legal owner, you would retain complete ownership and control over the property while alive. This is an important characteristic of the TOD deed and what separates it from another form of estate planning, creating a joint tenancy with rights of survivorship.
A joint tenancy with rights of survivorship gives all owners a present, equal, and legal interest in the property. For example, if you granted your daughter joint tenancy with rights of survivorship over your home, and you later wanted to sell the home, because she would be a current owner, you would need your daughter’s approval before selling it. Contrastingly, because the TOD deed creates a potential future interest in the property, if you named your daughter as the beneficiary in a TOD deed for your home, she would not have a present legal interest in it, and you would not need her permission before selling the property.
Potential Tax Savings
Because there is no change in ownership when the TOD deed is recorded, your designation of a beneficiary does not result in an immediate transfer of property. Therefore, the property is not considered a gift and is not subject to gift tax liability. Further, if a beneficiary later sells the property, for tax purposes, the property would be valued as of the original owner’s death date, rather than the date the original owner acquired the property. This would likely result in lower taxes when the property was sold.
Please understand that there are usually tax consequences in estate planning. You should always consult an accountant or estate planning/tax attorney to better understand the tax implications and liabilities of your estate plan.
Not Subject to Medicaid Reimbursement
If you were a Medicaid recipient during your lifetime, upon your death, Medicaid may seek reimbursement from your probate estate for payments made on your behalf. A benefit of the TOD deed is that it is not usually considered part of the probate estate and, therefore, is not property subject to Medicaid reimbursement.
Jointly Owned Property
TOD deeds can be trickier if you own your property as a joint tenancy. A married couple’s property is typically deeded as “joint tenants with rights of survivorship” or as “tenants by the entireties.” This means that your joint tenant with rights of survivorship inherits your share of the property upon your death and becomes the sole owner of the property. Therefore, even if you have properly recorded a TOD deed with a named beneficiary, your beneficiary is not entitled to the property until your joint tenant also dies. This is important to understand because, as the sole owner of the property, the joint tenant could revoke your TOD deed before he or she dies, leaving your beneficiary with nothing.
Mortgages, Taxes, and Creditors
Because you retain complete ownership over the property, you must continue to pay any mortgage and taxes on the property. You may file a TOD deed even if you have not paid off the mortgage on the property. However, when you die, and your beneficiary becomes legal owner of the property, the beneficiary would need to assume making mortgage payments or risk losing the property to foreclosure. Note that your beneficiary may be forced to either pay off your mortgage or refinance the property to keep it because many lenders will call the entire loan due when you die. It is also important to understand that a TOD deed will not shield the property from creditors. Any liens, mortgages, judgments, and/or claims of creditors follows the real property, even after your death.
TOD Deed Supersedes a Will
Generally, a TOD deed will supersede a will. Stated differently, if you have a TOD deed that designates Jane Doe as the beneficiary, and later create a will that designates John Doe as the beneficiary, Jane Doe will be the legal beneficiary of the property on your death, even if the will was executed after the TOD deed. However, the rules concerning this issue vary by state, and it is important to check your state’s property laws.
While the ownership interest in the property passes immediately and automatically to the named beneficiary at your death, the beneficiary will likely be required to record an affidavit (sworn statement) and a copy of your death certificate in the county in which the property is located before he or she can have the property titled in his or her name. This is a much faster and more cost-effective method to transfer real property than proceeding through probate.
Meeting with an Estate Planning Attorney
The above information is merely an overview of the TOD deed. It includes some positive and negative effects of using one. It is important to understand that each person’s estate is different and that one estate planning tool may work well for someone else, but not for you. Therefore, it is important that you research possible options for your assets and then seek out a qualified estate planning attorney to help you achieve your specific, comprehensive estate plan.