Transfer on Death Deeds

Transfer on Death Deeds, and transfer on death accounts TOD or paid on death accounts, can be a low-cost and simple way to avoid probate when transferring real or other property.  I have outlined below common issues that arise with transfer on death deeds.

Transfer on Death Forms or Deed Upon Death Forms

Many people find no-cost transfer on death deed templates online. These documents often can be unreliable and when combined with inexperienced grantors who may use incorrect language, the transfer on the death deed will not be effective. While not an issue with the deed itself, utilizing a no cost deed without an attorney’s help commonly leads to problems.

Difficult to Get Title Insurance

Most title insurance companies refuse to issue a title insurance policy until a new property owner owns the property for at least eighteen months. This means you must wait 9 or more months (depending on creditor laws of the state where the property is located) after the original owner of the property dies before obtaining title insurance on the property.  The reason is creditors and other potential beneficiaries have 9 or more months to file credit claims against the estate.

If the beneficiary inheriting the property desires to sell the property, the new buyer may not obtain title insurance on the property and thus will have problems obtaining a mortgage to purchase the property. Usually, probate can fix this issue. However, the whole point of using a transfer on death deed is to avoid probate.

Vulnerability to Claims by Grantor’s Creditors

The original owner’s creditors have 9 or more months (again depending on State creditor laws) to file a claim against the estate.  If a creditor files a claim against a transfer on death deed, this can trigger a lawsuit in local court, which is more expensive than handling a claim through a probate process.

Vulnerability to Claims by Beneficiary’s Creditors

In addition to making a claim on the original owner’s assets, creditors can file a claim on the beneficiary’s new real property. For example, a beneficiary going through a divorce, bankruptcy, insolvency, or large legal judgment against them, the related creditors can attach claims to any property that the beneficiary is inheriting.

Transfer on Death Deeds do not Handle Contingencies

Transfer on death deeds does not provide for workaround contingencies the way a trust does. For example, a trust will allow someone to leave property to a beneficiary.

However, if this beneficiary dies before they inherit the assets, the property passes as the trust states, which could be to the beneficiary’s children or the original owner’s other relatives.  Further, in the scenario outlined above, if a child inherits the property, the trust can hold the property. This is important if the child is a minor, has special needs, has creditors issues, is in a bad marriage, or otherwise is not mature or responsible.  Transfer on death deeds do not allow for this flexibility. Instead, the deed gives the surviving relative the asset when the grantor of the property passes away. This could lead to many problems especially if the new beneficiary is young and not responsible with their money.

Final Thoughts

A transfer on death deed is a low cost with little thought on planning. Hiring an experienced estate planning attorney to prepare a Will or Revocable Living Trust, familiar with the law and procedures of your state of residence, you are enlisting someone with knowledge of the laws. You will also have someone on your side to help you deal with potential creditors. Finally, an estate planning attorney can help you distribute the assets in the most tax-efficient way and protect your children’s inheritance from bad marriages, divorces, creditors, lawsuit, nursing home costs and potential estate and income taxes.

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