Problems with Transfer on Death Deeds (TOD Deeds)

Transfer on death deeds allow a person to transfer real estate to a designated beneficiary upon the grantor’s death. It allows the real estate to be transferred to the beneficiary outside of probate proceedings. Many owners prefer transfer on death deeds because, not only is it easy, but it is still revocable before the death of the owner. The designated beneficiary does not have any right over the property until after the grantor’s death. This means that the grantor can revoke the transfer on death deed or can refinance the property without the beneficiary’s consent.

To be effective, a transfer on death deed must be registered with the county recorder where your property is located. It may be revoked at any time by either executing a new transfer on death deed or issuing a notarized written revocation, and in both cases, registered with the county recorder of the county where the property is located. However, some problems arise with transfer on death deeds that a real estate owner needs to be aware of.

1. Not all states allow transfer on death deeds for real estate

The first main problem about transfer on death deeds is that not all states allow it for real estate. In New York, transfer on death deeds are only allowed for securities and brokerage accounts. As of May 2022, only 30 states allow transfer on death deeds. These states are

• Alaska
• Arizona
• Arkansas
• California
• Colorado
• District of Columbia
• Hawaii
• Illinois
• Indiana
• Kansas
• Maine
• Minnesota
• Mississippi
• Missouri
• Montana
• Nebraska
• Nevada
• New Mexico
• North Dakota
• Ohio
• Oklahoma
• Oregon
• South Dakota
• Texas
• Utah
• Virginia
• Washington
• West Virginia
• Wisconsin
• Wyoming

If your state is not included in any of the above, your transfer on death deed may not be recognized, and such property will still undergo probate proceedings in order to be transferred.

2. Transfer on death deeds does not provide for alternate beneficiaries

Assuming that transfer on death deeds for real estate are recognized in your state, another problem that arises with these types of deeds is the unavailability of contingent beneficiaries. For example, if you execute a transfer on death deed because you want to avoid probate proceedings but your designated beneficiary dies before you, your property will still be subjected to probate proceedings.

3. Difficulty in getting title insurance

Properties under transfer on death deeds are still subject to the creditors of the grantor. If the grantor dies and his probate estate is not enough to pay for his debts, the property under the transfer on death deed will be liable for such grantor’s remaining debts. For this reason, most title insurance companies won’t issue title insurance to the designated beneficiary until the period for the creditors to claim under state law have lapsed. In California, this period is 3 years after the grantor’s death, while in Nevada, this period is 18 months. Without title insurance, the new owner (the designated beneficiary) will have a difficult time selling the property.

4. Liability for both grantor’s and beneficiary’s creditors

Another problem arising from transfer on death deeds is that such property is liable for both the grantor’s and beneficiary’s creditors. As previously mentioned, the property will not be insured by title companies because it is still subject to the grantor’s creditors. At the same time, once the property is transferred to the beneficiary after the death of the grantor, such property also becomes liable to the beneficiary’s creditors. In case the beneficiary divorces, the property may also be claimed as community property by the other spouse A trust, on the other hand, can protect the property from the beneficiary’s creditors and in cases of divorce.

5. Inflexibility to adapt to contingencies

Another problem arising from transfer on death deeds is the inflexibility it provides. For example, when the designated beneficiary is a minor when the grantor dies, the minor will need the appointment of a legal guardian in order to receive the property. When the designated beneficiary is disabled, the property will form part of his estate for purposes of determining eligibilities for government benefits. When the designated beneficiary does not have the wisdom to manage the property, the property may be wasted. A trust, on the other hand, can protect the assets from a spendthrift child, can ensure eligibility of the designated beneficiary for government benefits, and can allow the management of the property while the child is a minor and give the property to the child upon reaching a certain age. A transfer on death deed is inflexible, while a trust is flexible and can attain a number of objectives.

6. Is superseded by joint tenancy with rights of survivorship or tenancy by the entirety

When a transfer on death deed is recorded in cases where the property is owned under joint tenancy with rights of survivorship or tenancy by the entirety, joint tenancy or tenancy by the entirety trumps transfer on death. For example, even if there is a transfer on death deed recorded with C as beneficiary on property jointly owned by A and B with rights of survivorship, when A dies, the property transfers to B and not to C.

Transfer on death deeds appear simple and easy to implement but may not always be the best solution for your desired estate planning objectives. Moreover, transfer on death deeds are not applicable in all states. New York does not recognize transfer on death deeds. Before deciding whether a transfer on death deed is the solution for your estate planning issues, consult with an estates lawyer. Usually, a trust is a more effective solution in achieving a number of estate planning objectives.

Should you need assistance in planning your estate, we at the Law Offices of Albert Goodwin are here for you. We have offices in New York City, Brooklyn, NY and Queens, NY. You can call us at 212-233-1233 or send us an email at [email protected].