The TOD Deed: Curb Your Enthusiasm
On January 1, 2016, California joined 27 other States when it codified revocable transfer-on-death (TOD) deeds as a new estate planning tool for real estate owners. Proponents of TOD deeds celebrate it as a simple and effective estate planning alternative for the average homeowner. This celebration should be viewed with a skeptical eye.
A TOD deed is a recorded instrument that automatically transfers title to a person's house or other qualifying real estate upon an owner’s death to pre-designated beneficiary. A TOD deed functions similarly to other pay-on-death benefits (such as life insurance policies, bank accts, IRA's, etc.) in which a person holds full title to the asset until his/her death. People accomplish this by completing standardized forms and following a few pretty straightforward steps.
Sounds good so far.
While the TOD deed is limited to certain types of real property (namely: condominiums, one to four dwelling residential units, or properties consisting of 40 acres or less of agricultural land improved with a single family residence), it does allow an owner to retain full ownership (including the power to sell or mortgage) of the property while designating a beneficiary after the owner’s death. It can also be revoked by timely filing certain state-approved forms.
On top of the TOD deed's attributes, preparation of the TOD deed is certainly less expensive than hiring an estate planning attorney, and is a method to avoid probate administration of the property upon an owner's death.
Sounds pretty great so far, right? However, consider the following:
a) A TOD DEED IS PUBLIC!!!!!!!!!! Anyone with access to county title records can see who you want your house to be transferred to at your death. Particularly your children or other natural heirs. It is analogous to publishing your Last Will and Testament on the internet.
b) The inherited real property is likely immediately subject to all liens, encumbrances, debts, and liabilities of the beneficiary. In contrast, holding a beneficiary’s interest in the property in a living trust greatly limits, or even eliminates, a creditor’s ability to attach or encumber the property.
c) A TOD deed is an inflexible planning tool. It cannot accommodate different terms of inheritance, or mandate the disposition of property for distribution, among multiple beneficiaries. By example, an owner has two kids, loves them both, but is concerned about the financial decision-making abilities of one of the kids. With a TOD deed, owner has 2 choices: make both kids beneficiaries and hope the financially irresponsible kid act responsibly, or make the financially responsible kid the sole beneficiary. Worse, the owner may choose the latter and expect the financially responsible kid to “do the right thing.” And if there is any disagreement, such disputes can wind up in litigation.
d) A TOD deed creates legal relationship between your children as the co-owners of your property after your passing. While many times such arrangements can work fine, it can potentially irreparably harm their relationship if there are disputes. See above for outcome.
e) You cannot restrict a person’s receipt of the property received via a TOD deed. What if you worry about an adult child’s ability to manage a substantial asset like a house?
f) A TOD deed further only addresses one of your assets and neglects to address the disposition of other assets (i.e. bank accounts, brokerage accounts, out-of-state real property, retirement accounts, jewelry, vehicles, etc…) and creating a feeling that their estate planning affairs are in order. Such non-real property assets are further often the source of significant family disputes after someone’s passing.
g) A TOD deed is not an effective mechanism for families with younger children.
h) Use of a TOD deed necessitates handling your estate planning affairs in a multi-pronged approach, with assets potentially being distributed via many different instruments (i.e. bank POD designations, beneficiary designations, joint tenancy, etc…). As such, any time a person desires to modify their estate plan, they will need to update EVERY bank account, brokerage account, life insurance policy, TOD deed, etc….
i) It is not known how title companies will treat TOD deed regarding matters such as title insurance coverage, sales, and refinances. They may further require homeowners to jump through numerous hoops when there is a TOD deed in us
j) There are other components of a person’s estate plan, such as health care durable power of attorney instruments, that a person may overlook in relying on a TOD deed as their estate planning vehicle.
In summary, use of a TOD deed can be an effective tool. But it is an incomplete tool, as there are many more components to effective estate planning. As planners, we worry the TOD deed will provide people with a false sense of security that their financial affairs are in order without even realizing the other planning issues that are being neglected.
The authorization of the TOD deed raises much of the same practical problems that have plighted many who have flocked to less expensive ways to handle their estate planning needs: incomplete estate planning causing unnecessary post-mortem expenses, future family conflicts, and worse….probate administration. Good estate planning is not a formula or fill-in-the-blank process, as every person’s situation is unique. Our job is to provide our recommendations after we have a complete understanding of a client’s individual needs and circumstances. TOD deeds may even be part of the ultimate plan, but never should be THE plan.
Dave Jarvis
Meghan DeSpain
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