A transfer-on-death (TOD) deed, also known as a "beneficiary deed," is a special type of deed that can be used to transfer ownership of real estate outside probate in a growing number of U.S. states.
How Transfer-on-Death Deeds Work
If you own real estate in your sole name without a co-owner, you have limited options if you want to pass the property to a beneficiary at your death without the necessity of probate. Assets placed in a living trust can avoid probate, but it's far simpler and less expensive to simply transfer the property by beneficiary deed if you live in a state that recognizes this option.
You can create and sign a transfer-on-death deed now, moving your property from your sole name into the name of your beneficiary, but the deed is not valid and does not take effect until you die. You continue to own the property during your lifetime, so you retain the right to mortgage it or sell it. Your beneficiary has no legal right to it until your death.
You do have to record the deed with the county land records office where the property is located. If you change your mind—perhaps you decide you want to leave the property to someone else at a later point in time—you can simply revoke the deed or create and record a new one to supersede the old one and transfer the property to someone else.
Because you're not technically giving the property away during your lifetime, the deed will not incur a gift tax. However, the property will contribute to the value of your estate for estate tax purposes.
States That Recognize Transfer on Death Deeds
As of 2021, the following states recognize transfer on death or beneficiary deeds.
- District of Columbia
- New Mexico
- North Dakota
- South Dakota
- West Virginia
At least five other states—Florida, Michigan, Texas, Vermont, and West Virginia—recognize an "enhanced life estate deed," sometimes referred to as a "Lady Bird Deed." An enhanced life estate deed functions in a manner similar to a transfer on death deed.
How a TOD Deed Avoids Probate
First, the owner signs a new deed that states who she would like to inherit the real estate at her death. Some states require that an attorney must prepare the new deed. For example, Florida law strongly recommends that an attorney prepare an enhanced life estate deed in order to avoid inadvertently preparing a regular life estate deed instead.
The new deed must be signed and recorded with public land records office, usually in the county where the real estate is located. Recording it should not incur real estate transfer taxes, because there won't be an immediate transfer of ownership. Recording fees can vary from state to state.
Finally, the death certificate is also recorded among the same public land records office after the original owner dies. This puts the world on notice that title to the real estate has been transferred into the name of the beneficiary listed in the TOD deed due to the owner's death.
When the Owner Changes His Mind
If the owner of the real estate should have a change of heart and decide that he does not want his named beneficiary to inherit his property, it's a simple matter to "undo" the deed. He can sign and record a new TOD deed naming someone else instead. This rescinds the previous deed because the most recent TOD deed is considered to be the valid one in most states.
It's always a good idea to also file a statement of revocation of the first deed with public land records, however. This way there's absolutely no confusion or doubt about your intent.
Determining Whether You Should Consider a TOD Deed
The ultimate goal of a TOD deed is to avoid the costly probate process after the owner of real estate dies. But the laws governing these types of deeds or similar documents can vary widely from state to state. In the end, a TOD deed might not be the right choice in certain situations.
Consult with an estate planning attorney to determine whether one of these deeds is right for you and your family.
Frequently Asked Questions (FAQs)
What are the disadvantages of transfer-on-death deeds?
There could potentially be issues with a title company refusing to insure the property. Transfer-on-death deeds can also be subject to some of the same issues as wills. They can be challenged or contested by an unhappy heir who expected to receive the property and then ties the matter up in court.
Can a beneficiary deed only transfer real estate?
Technically, a deed refers specifically to real estate, but several assets can be transferred in the same manner. Banks and credit unions offer payable-on-death accounts, and the Uniform Transfer-on-Death Securities Act allows brokerage accounts, stocks, and bonds to have beneficiary designations as well.
How will a transfer-on-death deed affect my mortgage?
You have the right to take a mortgage against the property during your lifetime, and you can do a transfer-on-death deed for a property that has a mortgage against it. But your beneficiary will have to pay the mortgage after your death when the property transfers to them. Any other liens against the property will follow it as well, becoming the responsibility of your beneficiary.
NOTE: State laws change frequently, and the following information may not reflect recent changes. For current legal advice, please consult with an attorney, because the information contained in this article is not legal advice and is not a substitute for legal advice.