Transfer on Death/TOD Deed: What It Is and When to Use It
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A transfer on death deed is a property deed that automatically transfers ownership of an asset to a specified beneficiary when the owner dies. The objective is to avoid having the asset go through probate, a court-supervised process that distributes a person's assets after death.
A TOD deed is relatively simple and inexpensive to set up, unlike trusts, which can work similarly to protect your assets from probate.
Here's what to know about transfer on death deeds and how to set one up.
» Not sure how to start your estate planning? Here's a 7-step checklist
How does a transfer on death deed work?
With this type of deed, you'll designate a beneficiary who will automatically own the property upon your death.
If you don't live in a state that allows TOD deeds, but own property in a state that does allow TOD deeds, you might still be able to use a TOD deed — but check with a lawyer.
You typically can still use the property as you wish while alive. A TOD deed generally does not affect the current owner's rights. The beneficiaries don't have access to assets until the owner dies.
You (and, depending on where you live, a person to whom you give power of attorney) can change or revoke the TOD deed while you're alive.
Depending on where you live, you may be able to name a backup beneficiary in case your first beneficiary dies before you do.
Which states recognize transfer on death deeds?
TOD deeds are available in several U.S. states and the District of Columbia. These states allow TOD deeds: Alaska, Arizona, Arkansas, California, Colorado, Hawaii, Illinois, Indiana, Kansas, Maine, Minnesota, Mississippi, Missouri, Montana, Nebraska, Nevada, New Mexico, North Dakota, Oklahoma, Oregon, South Dakota, Texas, Utah, Virginia, Washington, West Virginia, Wisconsin and Wyoming. In addition, Ohio has a TOD affidavit rule similar to a TOD deed.
How do you set up a transfer on death deed?
TOD deeds typically include the following, though specific requirements may vary by state.
A legal description of the property.
The names of the grantor (the current owner/owners).
The names of the intended beneficiaries.
According to state law, language that specifies a transfer to the "grantee beneficiary" upon the death of the owner.
Notary provisions or witness signatures, depending on the state requirements.
Registration and filing with your county property records (there may be a small fee).
Some states may offer specific transfer on death deed templates for free download. However, if you want extra help or professional advice about whether this deed is right for you, consider hiring an estate planning attorney.
» Looking for an estate planning attorney? Here's what to know
Pros and cons of a transfer on death deed
Pros
Avoid probate. Property with a TOD deed typically does not have to pass through probate court to transfer to its beneficiaries. In some states, probate is a long, expensive process and can subject your assets to additional taxes.
Avoid federal gift tax paperwork. Giving away property while alive may count as a gift in the eyes of the IRS and may require the giver to file a gift tax return. TOD deeds avoid this by transferring the property after you die.
Maintain Medicaid eligibility. You may not qualify for full Medicaid benefits if you've transferred property during the five years before applying. Property with a TOD deed doesn't count as an instant transfer of the property and thus shouldn't affect your eligibility.
It might prevent property from being used to repay Medicaid benefit costs. For example, U.S. federal law allows states to claim a person's property after death to recover Medicaid costs for long-term medical care. However, in some states, property with TOD deeds may not be part of your estate and can't be claimed by Medicaid.
Cons
Beneficiaries may get equal shares of the asset. In some states, such as California, multiple beneficiaries on TOD deeds can't inherit unequal property shares, and you can't name a backup beneficiary. In addition, your estate plan may be too complex for a TOD deed if you have multiple children to whom you'd like to pass property.
Not available in many states. If you live in a state that doesn't allow TOD deeds, you'll need to find an alternative estate planning method.
» MORE: What is an advance directive?
Alternatives to a transfer on death deed
Lady bird deeds. Also called enhanced life estate deeds, these deeds allow owners to maintain control of the property until death, when the property automatically transfers to a beneficiary without going through probate. They're only available in five states — Florida, Texas, Michigan, Vermont, and West Virginia — and are often used to maintain Medicaid eligibility.
Revocable living trusts. These trusts remove assets from your estate so they can bypass probate upon your death. Living trusts can give you continued control over the asset during your life, but they can be more expensive and complex to set up than a deed. Living trusts are not the same as living wills.
Life estate deeds are available in most states and keep your property out of probate but require your beneficiaries' permission to make any changes.
Wills. These can include property transfers but may undergo probate after your death.
