Most people want to avoid probate when it comes to estate planning because the probate process can be expensive and time-consuming.
Fortunately, there are several ways to transfer property without going through the probate process: living trusts, joint tenancies, life estate deeds, and a transfer-on-death deed (TODD). This estate planning tool is very efficient and 31 states allow such a transfer to a beneficiary.
A transfer-on-death deed is also called a beneficiary deed. A Ladybird deed in Michigan accomplishes the same thing. Read on to discover whether a transfer-on-death deed is an option for you.
What Is a Transfer-on-Death Deed for Property?
A small estate consisting of just a house or real estate are common assets to transfer to an heir using a transfer-on-death (TOD) deed rather than a will. To create a transfer-on-death deed (also called a beneficiary deed), the deed should state the following details:
- The name of the owner of the property (the grantor)
- The legal description of the property as found in tax records
- The named beneficiary who will receive ownership of the property
- That the deed does not become effective until the owner's death
To ensure the transfer-on-death deed is valid, it must be signed in front of a notary public and notarized. Then, the owner must record the deed with a county clerk at the local county recorder's office, where land records are kept. If the owner fails to sign, notarize, or record the deed, the deed is invalid.
The owner may wish to specify an alternate beneficiary in case the named beneficiary has preceded them in death.
After the deed is filed, the grantor retains full power over the property during their lifetime. They can revoke the deed at any time by filing a revocation document. Some states have a revocation form for owners to use, or they have a sample of an acceptable form in their statute. The revocation form must be filed in the office where the original deed was filed.
Transfer on Death Deeds and Joint Ownership
Community Property States
A transfer-on-death deed is subservient to shared ownership rights. If you live in a community property state, like California, a surviving spouse inherits the shared property.
The same for properties owned by family members or friends as joint tenants with rights of survivorship. The decedent's property interest transfers automatically to the joint tenant. A TOD deed may still make sense in this situation if both parties are willing to list the same person on the deed as their beneficiary.
Tenants in Common
In this form of joint ownership, each party has an interest in the property but the other party's interest is inherited by their heirs or beneficiaries, not by the co-owner. These owners can use a TOD deed to transfer their share of interest in the property to a beneficiary. The beneficiary becomes a co-owner.
Advantages of Transfer-on-Death Deeds
There are several benefits to transfer-on-death deeds for the transferor:
- You can change the beneficiary at any time during your lifetime. In essence, it is a revocable transfer-on-death deed.
- The beneficiary does not have any legal interest in the property until you pass away, so the beneficiary's creditors won't be able to place a lien on the property until the deed becomes effective.
- Expenses related to the transfer-on-death deed are less than other methods of transferring property, such as drafting a trust or probating a will.
- Probate is not required to transfer the property. Avoiding probate can be a big benefit as the probate process can be time-consuming and costly.
- If you hold property in another state, it's easier to transfer property using a TODD than to have to open an ancillary probate proceeding.
Disadvantages of Transfer-on-Death Deeds
Nineteen states do not allow a transfer-on-death deed. Be sure yours does.
If there are title problems with the property, the new owner won't know until they try to transfer the property and find they can't receive it.
If the deceased person's estate has unsatisfied debt, debtors can force the sale of the property to pay the debt. It is part of the estate of the original owner and does not automatically transfer to the new owner.
TOD properties don't count toward probate, but they may still be part of the valuation of an estate for estate tax purposes.
TOD properties don't count toward Medicaid spend-down because the property hasn't actually left your control. Furthermore, it may or may not protect your property from Medicaid estate recovery after you die.
As with almost any kind of inheritance, a transfer-on-death deed can be challenged in probate court. A loved one who thought they were going to inherit a family property in a will may be surprised to discover this joint ownership in a TODD. They could challenge the validity of the deed or argue that you lacked full mental capacity when you drafted it.
As opposed to joint tenancy with the right of survivorship, transfer-on-death beneficiary for property does not automatically transfer the title to the beneficiary. If there is another co-owner, most states give that joint tenant time to challenge the title on the property for a certain amount of time.
State Laws on TOD Deeds
When you name a beneficiary who will obtain title to the property upon your death, you must do so according to your state's laws. Be especially aware of the rights afforded to married couples, which can supersede other instructions.
Transfer-on-death deeds are allowed in these states:
- District of Columbia
- Michigan (a Ladybird Deed)
- New Mexico
- North Dakota
- South Dakota
- West Virginia
Need Legal Advice? Ask an Estate Planning Attorney About a TOD Deed
There are several requirements to create a valid transfer-on-death deed for real property transfer. If you fail to comply with your state law, your transfer-on-death deed can be invalid. Depending on your situation, a living trust may be a better way to transfer real property.
If you have questions, take the time to get accurate legal advice. Call an estate planning attorney in your area.