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A common method of avoiding probate for real estate (in states that allow it) is the creation of a Transfer on Death (“TOD”) Deed. Virginia, Washington, D.C. currently allow for TOD Deeds. Maryland does not, however, in this session of the Maryland legislature, the topic is being discussed.
This method of transferring real estate upon death may appear to be less expensive than establishing and using a Revocable Trust, but there are significant downsides to be considered.
DIY TOD Deeds - Downloadable TOD Deed forms can be readily found online. But, as with other “Do-It-Yourself” legal documents, these forms can be unreliable and mistakes irreversible. A grantor must use the correct language, or the transfer will not be binding.
Title Insurance Requirements - Another consideration is title insurance companies. Some have a requirement for the new owner of the property to live in it while claims against an estate are settled. Should a new owner wish to sell the property before the estate settles, the new buyer could have problems with obtaining a mortgage, as most mortgage companies require title insurance before making a loan.
Creditors - There are also issues regarding the creditors of the grantor, who can go after the real estate if it is transferred by way of a TOD Deed. Such an example of this could be a divorce, bankruptcy, or judgments.
Homeowners Insurance - There are very serious concerns regarding homeowner’s (fire and flood) insurance to consider. Recently, an insurance company denied a claim where the claimant was the beneficiary of a TOD Deed. The denial was upheld by a court decision, which ruled that the decedent’s insurance ended when the decedent died and that the beneficiary of the TOD Deed should have obtained their own homeowner’s (fire and flood) insurance.
Real Property Transfer Taxes - A TOD Deed does not provide for the same solutions that a Revocable Trust can. If the beneficiary is not a husband, wife, or child, real property transfer tax can take effect when the TOD Deed is filed or when the beneficiary changes the deed so that it is solely in the beneficiary’s name. Using a Revocable Trust will help a beneficiary avoid the payment of real property transfer tax regardless of the relationship, as well as making it clear that good title is transferred to the beneficiary.
For many people, their home is their single, largest investment. Because of the potential problems that can occur with a TOD Deed, it is important to speak with an estate planning attorney before completing one. There are other methods of transferring real property upon death that may make more sense for you. Contact us to discuss your options.