Probate can be expensive and time-consuming, but it may be avoidable. For real estate, one way is with a transfer on death deed (TOD deed).
How a TOD deed works
In a TOD deed, the current owner designates one or more persons as beneficiary. 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. In some states a TOD deed is referred to as a beneficiary deed, TOD instrument or deed upon death.
As of September 2019, 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, Missouri, Montana, Nebraska, Nevada, New Mexico, North Dakota, Oklahoma, Oregon, South Dakota, Texas, Utah, Virginia, Washington, West Virginia, Wisconsin and 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 a Lady Bird deed.
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.
Deeds held by married couples typically state that they own property “as joint tenants with rights of survivorship" or as “tenants by the entireties." If one spouse dies, the surviving spouse automatically becomes sole owner. 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.
Advantages of a TOD deed
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 for large estates with various types of property, a comprehensive estate plan that includes a living trust may be advantageous.
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 original owner's date of death, not the value when the original owner acquired the property.
- Maintaining Medicaid eligibility. If a person applying for Medicaid has made a gift of property within a certain period before applying, that gift may delay the receipt of benefits. Upon a Medicaid recipient's death, the government may seek reimbursement from the recipient's probate estate. A TOD deed is not usually considered a gift of the property, nor is the property part of the probate estate subject to reimbursement.
Creating a transfer on death 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 transfer will take place upon the death of the current owner.
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 or 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.
Preparing a TOD deed is not complicated but must be done in compliance with state law. Some states have an approved form, and using it may be the safest way to be sure your compliance.