There are many ways for a person to structure their estate plan. Sometimes a Last Will and Testament is sufficient, other times, a Revocable Living Trust is required to ensure that assets are divided pursuant to a person’s intent. Regardless of which estate planning vehicle is used in your plan, there is the opportunity for a transfer-on-death deed (TOD deed) to be a part of your estate plan. Though the TOD deed is not available in all states, this legal document can effectively move your real estate to your intended beneficiaries without the need for probate. Like any estate planning tool, it has nuances.
How Do TOD Deeds Work?
A TOD deed operates similar to any other deed in that it passes real estate from one person to another person (or entity), but it is unique in that it does not come into force and effect until the original owner or owners pass away. The mechanics work the same as any other deed. The deed should be drafted by an attorney who has an understanding of how TOD deeds work. The deed is then signed by the current owners of the property and recorded in the county where the real estate is located. The TOD deed will identify and name both the property and the designated beneficiary or beneficiaries. The beneficiary can be an individual, a trust, or even a charity. When the original owner passes away, the named beneficiary will immediately assume ownership of the property. Your beneficiaries will not have to navigate the probate process and the prolonged waiting period that comes along with it.
The Benefits & Drawbacks
There are many benefits to a TOD deed. Here are a few:
1. Probate Avoidance: The primary attraction to a TOD deed is its ability to bypass the often cumbersome, expensive, and time-consuming probate court proceedings.
2. Flexibility: The TOD deed is flexible in two ways. First, it can be revoked or modified at any time. This means you are free to name a new beneficiary, remove a beneficiary, or sell the real estate at any time after you record your TOD deed. A beneficiary named on the TOD deed cannot prevent you from selling the real estate, modifying the beneficiary, or otherwise influence any of your rights with your property. Second, during your lifetime, the TOD deed does not encumber the property in any way that would prevent you from selling, mortgaging, or otherwise managing or disposing of your real estate. Unlike when you place your real estate into an irrevocable trust, you maintain the ability to continue to manage your real estate as you wish.
3. Protection from Beneficiaries: Sometimes people will follow the bad advice of putting their child or intended beneficiary on their title with them in order to avoid probate. If done, this subjects you to your beneficiary’s creditors. By using the TOD deed, your beneficiaries’ creditors cannot attach to the property. You retain full rights to your property during your lifetime. Upon your death, just as with jointly titled property, your real estate will pass to your intended beneficiary without going through the probate process. In other words, it gives you the advantage of jointly titling your real estate with your intended beneficiaries without the drawbacks.
4. Tax Savings. As noted under point 3, naming your intended beneficiary as a joint owner is not the best idea. Another reason is that your beneficiary will lose out on the step-up in basis and may be subject to a capital gains tax. If you use a TOD deed instead, your beneficiary will enjoy a step-up in basis on the real estate. This means that if they turn around and sell the real estate after your death, they will not pay a capital gains tax.
5. Cost Effective. Finally, drafting a transfer on death deed is often a cost-effective way to pass one of your most significant assets outside of probate to your intended beneficiaries.
Although a TOD deed has many advantages, there are a few disadvantages or limitations. A few are listed below:
1. Too Many Beneficiaries: If you have many intended beneficiaries (more than 2 or 3 max), it may not be appropriate for several people to inherit the real estate. Multiple beneficiaries can result in disagreements with what to do with the property after you die and result in a suit for partition if the beneficiaries cannot come to an agreement.
2. Limited Application: A TOD deed attaches only to one piece of property. If you have several properties, you will need a TOD deed for each property. The more deeds created, the more expensive the estate plan. Further, if you decide to sell your property and purchase new real estate, you will need to execute a new TOD deed for the new real property. With all of the paperwork associated with purchasing new real estate, it can be easy to forget to take this extra step and failure to do so could disrupt the estate plan.
3. Limited Planning Opportunities: The TOD deed does not account as well for the “what if” situations that can be addressed more comprehensively in a revocable trust. What if a minor inherits, for example, due to the death of a primary beneficiary? The TOD deed is an estate planning tool that typically only allows for planning at the most basic level. That being said, you can use the TOD deed to move your real estate into a Revocable Living Trust for more comprehensive planning. This is typically done when a lender does not approve the transfer of real estate into the Revocable Living Trust.
Speak with the Attorneys of Select Law Partners, PLLC
The TOD deed is a simple estate planning document that Virginia residents can use. There are many advantages to the TOD deed and they can be incorporated into almost any estate plan. To discuss the TOD deed and other estate planning tools further with an attorney, contact our office to set up your consultation.
Sara Josey
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- How Virginia’s Transfer-On-Death Deeds Work - September 13, 2023
