Q. I was recently discussing with my husband what would happen to our house in Annandale, Virginia when we are no longer around, especially since we don’t have our estate planning in place yet. One my friends’ parents recently passed away and the family was going through the nightmare of probate. I would never want a similar fate for my family! I recently came across information about something called a transfer on death deed, which from what I’ve read allows you to name a beneficiary who will automatically get title to your property when you pass away, without having to go through probate. Is this a good option to consider, either instead of estate planning or as part of estate planning? Thanks for your help!
A. Transfer on Death (TOD) deeds, though allowed in the majority of states, are generally not a good estate planning tool, and have many disadvantages, which will be explained in this article. TOD Deeds are allowed by statute in States that have adopted such a statute. TOD deeds are revocable, which means that if you name a beneficiary but later change your mind, you can name a new beneficiary or revoke the TOD deed entirely. Dangerously and contrary to what most people expect, TOD Deeds (just like other beneficiary designations) take priority over other methods of transfer, such as wills and trusts, even if the will or trust contains a contrary provision saying what should happen to the real estate. Creating a TOD deed is essentially the same thing as naming a pay on death (POD) beneficiary on a bank account or transfer on death (TOD) beneficiary for a brokerage account. You name one or more beneficiaries now, who then inherit the property at your death, ideally without the need for probate court proceedings. It sounds good at first, but TOD deeds and other beneficiary designations are generally not a good way to plan your state. Please read my prior article about all the downsides of beneficiary designations.
Despite their vast limitations, TOD deeds are currently offered in 32 states, including Washington, DC. These states are listed later in this article.
Why TOD Deeds Are Not the Best Option
TOD Deeds have a few pros, but the cons definitely outweigh them. For example, on a positive note:
- A TOD deed does not create a present interest in the named beneficiary. This means, if you name a beneficiary in this type of deed, you have not completed a gift for gift tax purposes;
- In addition, if the owner changes his or her mind about the beneficiary, he or she can change the designation at any time before death;
- Because the beneficiary has no interest in the property until the owner dies, the beneficiary’s creditors cannot reach the property;
- A probate proceeding may cost more in time, money, and aggravation than the fees associated with a TOD deed;
- You can use a transfer on death deed to pass property to anyone when you die. This includes family members, friends, other loved ones, or even charitable causes.
However, there are many cons of TOD deeds:
- TOD Deeds do not always avoid probate. For example, if any of the named beneficiaries predeceases the property owner, then unintended consequences will result. For example, if your beneficiary dies first, your property goes to probate anyway. If you pass away along with or after your beneficiary, and don’t have a backup beneficiary named, your property will go through probate with the rest of your estate. A well-drafted trust will eliminate this possibility.
- If a named beneficiary becomes disabled prior to the death of the owner, a disabled beneficiary could be knocked off of public benefits, such as SSI and Medicaid. A well-drafted trust will eliminate this possibility.
- A person may try to establish a TOD deed without consulting an estate planning lawyer and may make legal mistakes. Again, what if an owner names one beneficiary but neglects to provide for the possibility that the beneficiary predeceases the owner? To avoid unintended consequences like this or other mistakes, a TOD deed should not be used as a substitute for comprehensive estate planning done with an experienced elder law attorney.
- TOD Deeds naming multiple beneficiaries should never be done unless all beneficiaries get along very well, because no one is person in charge under a TOD deed, unlike a trust where you designate a trustee to sell the property or make the decision whether to sell the property. For example, when two children agree to sell the real estate and the third child does not, the family may end up in court – with attorney fees that far exceed the costs of probate.
- If multiple owners make a TOD deed, then the last one surviving can revoke the deed or change the beneficiaries against the wishes of the other deceased owners.
- Joint ownership takes precedence over a TOD deed. If the property is jointly owned with right of survivorship with another person, such as your spouse, this joint ownership with the right of survivorship supersedes a TOD deed. The property will instead transfer to the other owner if you pass away. The surviving owner can then revoke the TOD beneficiary designation. This is especially problematic with blended families where there are children from prior marriages. In a blended family, the surviving spouse retains the ability to revoke or execute a new TOD deed, and may name only his or her surviving children.
- If a TOD Deed names any minor beneficiaries to receive the property upon an owner’s death, a guardianship (lifetime probate) proceeding could be required. The court would need to appoint a legal guardian to administer and manage the property interest of each minor beneficiary until he or she attained the age of 18. And do you really want an 18-year-old inheriting a valuable piece of real estate? In order to avoid this additional burden and cost, you should choose a better alternative to the TOD Deed, such as a living trust.
- TOD deeds need to be recorded immediately (prior to death) in the county or city where the real estate is located. A TOD deed is generally void if it is not recorded before the death of the owner.
- A TOD deed is not a good choice if the beneficiary needs to sell the property and receive the proceeds soon after the owner’s death, because doing so may not be possible until 12 months or after the owner’s death.
- In many states, including the District of Columbia, title companies insist that real estate go through probate in order to be subject to creditor claims, even though the goal of a TOD deed is to avoid probate.
- In many states, title insurance companies won’t insure property that passes through a TOD deed. Again, this problem is avoided with a trust.
- Although TOD deeds may be accepted in many states, they aren’t often used due to all of the above potential issues and liabilities, as well as other potential problems that are state specific in various states.
States that Allow TOD Deeds or Similar Arrangements
Currently, TOD deeds (or similar alternatives) are offered in 32 states (including the District of Columbia). These include:
- Alaska
- Arizona
- Arkansas
- California
- Colorado
- DC
- Florida (via a “Lady Bird deed,” aka “enhanced life estate deed” aka “life estate deed with powers”).
- Hawaii
- Illinois
- Indiana
- Kansas
- Maryland via enhanced life estate deed, aka Lady Bird deed, aka life estate deed with powers
- Michigan via a Lady Bird deed, aka enhanced life estate deed aka life estate deed with powers
- Minnesota
- Missouri
- Montana
- Nebraska
- Nevada
- New Mexico
- North Dakota
- Ohio
- Oklahoma
- Oregon
- South Dakota
- Texas
- Utah
- Virginia
- Vermont via an enhanced life estate deed, aka Lady Bird deed, aka life estate deed with powers.
- Washington
- West Virginia
- Wisconsin
- Wyoming
Notice that for some of the states listed above, including Maryland, I have noted that the transfer on death is accomplished through an alternative arrangement, called either an “enhanced life estate deed”, a “life estate deed with powers”, or “Lady Bird deed”, which all mean the same thing (I will use the terms interchangeably). An enhanced life estate deed is a life estate deed where the owner deeds an actual ownership interest (unlike a TOD deed where no ownership interest is being conveyed until death). The owner of the property retains an ownership interest called a life estate, along with the enhanced power to sell the property without permission of the person or people owning the remainder interest.
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Note that with a traditional life estate deed (i.e., not a life estate deed with powers), the transfer of the remainder interest is irrevocable, meaning for the house to be sold after the conveyance of the remainder interest, both the owner of the life estate and the owner of the remainder interest must join in the sale, and when the property is sold, the owner of the life estate receives a fractional interest representing the value of the life estate, and the owner of the remainder interest receives a fractional interest representing the value of the remainder interest.
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Although enhanced life estate deeds are acceptable in several states, they are typically not used except in connection with advanced Medicaid planning. These are some of the differences and downsides of enhanced life estate deed vs. TOD deeds:
- If the property is sold, the beneficiary (i.e., the owner of the remainder interest) of an enhanced life estate deed is entitled to a very significant portion of the proceeds of sale – not so with a TOD deed because the beneficiary of the prior owner has died.
- The owner of the life estate interest can change the beneficiary and record a new deed without the consent of the current remainder beneficiaries.
- Title insurance and warranty of title problems apply in almost every state that allow these deeds.
- Similar to TOD deeds, if the grantee is disabled or on public benefits at the death of the grantor, a loss of public benefits could result. However, a trust could be named as grantee to solve this potential problem.
- If using power of attorney (POA) to sign an enhanced life estate deed, the POA should give broad gift-giving ability, and typically most do not.
- If the owner of the life estate has a mortgage, an enhanced life estate deed may technically trigger the ability to call the note (unless the lender gave consent) since the interest is vested in the grantee.
- Unlike transfer on death deeds, enhanced life estate deeds cannot indicate what happens if the beneficiary dies first, unless a trust is named as the beneficiary.
- With an enhanced life estate deed, if the owner of the life estate wants to get a a reverse mortgage. Most lenders will require the owner of the remainder interest to sign off, agreeing to be responsible on the mortgage. This is not the case with the transfer on death deed, again because a transfer on death deed only takes effect upon death.
Alternatives to TOD Deeds or Enhanced Life Estate Deeds
As I have explained, TOD deeds and enhanced life estate deeds are no substitute for a well-crafted living trust. Trust Planning techniques, including revocable living trusts and the Living Trust Plus irrevocable Medicaid asset protection trust, afford much greater protection for you and your family when titling your property. For example, if you place your property into a properly drafted Revocable Living Trust, then you could add protections that would deal with disability, divorce, creditors, and catastrophic illness protection for your beneficiaries. Before leaping into a situation, we urge you to consider all of your options and let us help you select the right strategy for your family.
Below are two options to explore:
Revocable Living Trusts
A Revocable Living Trust can function as a Will, but it also offers other benefits that you should consider. A Revocable Living Trust avoids probate, enables your heirs to receive your property more quickly, ensures your trusted family members (and not the court) oversee your estate distribution, maintains your privacy, and does not require an annual fee. Read more about Revocable Living Trusts Living Trust.
Living Trust Plus® (LTP)
The Living Trust Plus® (LTP) functions much like a Revocable Living Trust and maintains much of the flexibility of a Revocable Living Trust, but protects your assets from the expenses and complexities of probate PLUS lawsuits PLUS Medicaid PLUS veterans aid in attendance for wartime veterans. The LTP protects the trust creator’s assets from lawsuits, medical expenses, and — most importantly for the 99.8% of Americans who are NOT among the ultra-wealthy — from the devastating costs of nursing home care, and even offers assistance with paying for in-home care and assisted living care for veterans via the Veterans Aid and Attendance benefit.
For most Americans over age 65, an LTP is the preferable form of estate planning because it includes asset protection for the person planning, and not just for that person’s children or other descendants. For purposes of Medicaid eligibility, this type of trust is the only type of self-settled asset protection trust that allows a settlor to retain an interest in the trust while also protecting the assets from being counted by state Medicaid agencies.
Plan in Advance for Yourself and Your Loved Ones
Here at the Farr Law Firm we have strategies to help all types of people at all ages to plan for themselves and their loved ones. By planning in advance, each person can retain the assets it has taken a lifetime to accumulate and the peace of mind that their family’s needs will be adequately and properly addressed. If you or members of your family have not done Incapacity Planning, Estate Planning, or Long-term Care Planning, or if a loved one is beginning to need more care than you can handle, please contact us as soon as possible to make an appointment:
Northern Virginia Estate Planning: 703-691-1888
Fredericksburg, VA Estate Planning: 540-479-1435
Rockville, MD Estate Planning: 301-519-8041
Washington, DC Estate Planning: 202-587-2797
About Evan H Farr, CELA, CAP
