A transfer on death deed is a legal document that allows property owners to designate beneficiaries who will inherit their real estate upon death. The property covered by the deed typically avoids the probate court process, often saving beneficiaries time, money, and stress throughout the inheritance process.
These types of deeds are relatively new, and mistakes are easy to make when drafting them—even a simple mistake can result in serious financial consequences, so it’s smart to work with a knowledgeable attorney.
Before you meet with your lawyer to create a transfer on death deed, let’s review how it works and its potential benefits and drawbacks.
What is a transfer on death deed?
A transfer on death (TOD) deed specifies one or more beneficiaries who will inherit real estate upon the owner’s death (known as the grantor). A TOD deed is different than a last will—it may also be called a beneficiary deed, revocable transfer on death deed, “Lady Bird” deed, and transfer on death instrument, depending on the state.
Regardless of the name, key features of this legal document typically include the following:
- It takes effect only upon the death of the property owner
- The owner retains full control of the property during their lifetime
- Beneficiaries have no rights to the property while the owner is alive
- It can be revoked or changed by the owner at any time before death
It’s important to note that while these can be useful estate planning documents, they’re not available in every state or suitable in all situations. The specific rules, requirements, and implications of using TOD deeds vary by jurisdiction, so you should review your local laws and consult an estate planning lawyer before proceeding.
How a TOD deed works
In a TOD deed, the current owner designates one or more persons as beneficiaries. The beneficiary automatically becomes the owner of the property when the current owner dies. A beneficiary can be an individual or an organization, such as a charity.
A married couple may also create a TOD deed. The beneficiary will not acquire the property until the second spouse dies, but the surviving spouse can revoke the TOD deed before then.
A beneficiary should be designated by name, never just by their relationship to you. If you designate two or more beneficiaries, indicate how they will take title — typically either “as joint tenants with rights of survivorship" or “as tenants in common." You may also designate alternative or successor beneficiaries, in case the first beneficiary dies.
TOD deed states
As of writing, the District of Columbia and the following states allow some form of TOD deed:
- Alaska
- Arizona
- Arkansas
- California
- Colorado
- Hawaii
- Illinois
- Indiana
- Kansas
- Maine
- Minnesota
- Mississippi
- Missouri
- Montana
- Nebraska
- Nevada
- New Mexico
- North Dakota
- Ohio
- Oklahoma
- Oregon
- South Dakota
- Texas
- Utah
- Virginia
- Washington
- West Virginia
- Wisconsin
- Wyoming
Ohio has replaced the TOD deed with a TOD affidavit, but the effect is the same. With a trend toward permitting TOD deeds, more states may be added in the future. A few states, such as Michigan, have a similar but technically different document, commonly called Lady Bird or enhanced life estate deeds.
If your property is not located in a state that allows TOD deeds, you may still be able to avoid probate by other means, such as transferring property to a living trust.
Advantages of a TOD deed
The following are a few benefits of the TOD deed compared with other methods of transferring property upon death:
- Transfer by will. Even with a will, the property must go through probate to be transferred to the new owner. A TOD deed avoids probate.
- Joint ownership. Having someone on the deed as a joint owner with rights of survivorship will avoid probate. Upon the death of one owner, title automatically goes to the surviving joint owner or owners. But all joint owners have equal rights in the property. Therefore, selling or mortgaging the property will require the agreement of all joint owners. With a TOD deed, you keep full control of the property.
- Transfer to a living trust. While transferring property to a living trust can avoid probate without sacrificing control, setting up a trust requires a more complicated document than a TOD deed. If an attorney prepares the document, creating a living trust will be significantly more expensive than a TOD deed. But there are several disadvantages to TOD deeds that you need to consider (see below).
Other advantages of a TOD deed may include:
- Maintaining homestead advantages. Many states offer asset protection and taxation benefits for a person's principal residence. These benefits may be lost with certain types of ownership transfers, but not with a TOD deed.
- Tax savings. Designating a beneficiary is not an immediate transfer, so no federal gift tax is owed. The beneficiary acquires ownership on the current owner's date of death. If the beneficiary later sells the property, any capital gain will be based upon the value of the property at the time of the owner's death, not the value when the original owner acquired the property.
Creating a transfer on death deed
Preparing a TOD deed is not complicated, but it must be done in compliance with state law. It's advisable to consult a legal professional or use state-approved forms to ensure your TOD deed meets all legal requirements and effectively serves its intended purpose. Here are the general steps you’ll follow to create one:
Step 1: Prepare the deed
As with any real estate deed, the document must comply with state law. All real estate deeds must include certain information, such as the names of the grantor (current owner) and grantee (beneficiary), legal description of the property, signature of the grantor, and legally required witness and notary provisions. Other requirements may include minimum type size and formatting to allow space for recording stamps.
Special language must be used to create a TOD deed, clearly stating the name of the beneficiary, who is usually referred to as the “grantee beneficiary," and that the transfer will take place upon the death of the current owner.
Step 2: Sign and notarize
After preparing the deed, you must sign it in the presence of a notary public. Some states may require additional witnesses, so make sure you follow your jurisdiction’s requirements.
Step 3: Record the deed
Prior to the death of the current owner, the TOD deed must be recorded in the property records of the county where the property is located. This is simply a matter of taking the original TOD deed to the county public records office—usually the county clerk's office, county land records office, or the register of deeds—and paying a small fee.
The records clerk will take the deed, stamp it to indicate the date it was received, take whatever other action is necessary to have it officially entered in the county records, and return the original to you.
Common problems with transfer on death deeds
While TOD deeds are great tools for estate planning, they’re not without potential complications:
- Availability and validity. TOD deeds aren’t universally accepted, which can create challenges for property owners with assets in multiple jurisdictions or those relocating to different states.
- Complicates joint ownership. When multiple individuals own property, they must unanimously agree to the deed, and the death of one joint owner may interfere with the intended transfer process.
- No contingent beneficiary. If the primary beneficiary dies before the property owner and there’s no alternative beneficiary, the TOD may become ineffective and potentially subject the property to probate.
- Debt liability. Inheriting property through a TOD deed doesn’t shield beneficiaries from the deceased’s outstanding debts. They may find themselves responsible for settling liens, mortgages, or other claims against the estate.
- Revocation and updates. Insufficient records of revocations or modifications can lead to legal disputes and unintended property transfers.
- Legal and title issues. Incorrect execution of TOD deeds or existing claims to the property (such as liens or mortgages) can create title problems that may require legal intervention to resolve.
- Impact on Medicaid and other benefits. Property inheritance through TOD deeds can affect beneficiaries’ eligibility for means-based government programs.
- Potential family conflicts. Unequal distribution of assets through TOD deeds may spark family disagreements, not to mention possible legal challenges to the property transfer.
Given these potential issues, it’s crucial to consult an estate planning attorney before creating a TOD to confirm it aligns with your overall estate plan and addresses any complications.
Alternatives to transfer on death deeds
TOD deeds aren’t the only option to transfer real estate after death. Here are some alternatives you might consider:
- Will. A last will and testament specifies how you want your assets, including real estate, distributed after you pass away. While property transferred through a will typically goes through probate, it offers flexibility in dividing your assets and naming guardians for minor children.
- Living trust. A revocable living trust allows you to transfer your property into a trust during your lifetime. You maintain full control of the assets as the trustee, and upon your death, the property is distributed according to your wishes without going through probate.
- Gifting. You can choose to give your property to your intended beneficiaries during your lifetime. However, this option means giving up control and may have tax implications.
To help you determine the best option for your needs, consider using our last will and trust assessment service. Attorneys from our independent network can walk you through all parts of the estate planning process, including financial power of attorney and healthcare directives, to help ensure your property is distributed according to your wishes.
FAQs
Can a TOD deed be revoked?
Yes, a TOD deed can be revoked at any time before the grantor’s death. To do so, the grantor must file a revocation document or a new TOD deed with the county recorder’s office.
How can a transfer on death deed help avoid probate?
Transfer on death deeds help avoid probate by automatically transferring property ownership upon the grantor’s death. The property passes directly to the named beneficiaries, bypassing the time-consuming and often expensive probate process.
What are the tax implications of a TOD deed?
A TOD deed doesn’t affect property taxes during the owner’s lifetime. Upon transfer, the beneficiary may pay capital gains taxes if they decide to sell the property, depending on how much profit they make from the sale. They may also be subject to estate taxes and property tax reassessment.
Edward A. Haman, Esq. contributed to this article.
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