Estate Planning: Providing Assistance with Transfer on Death (TOD) Deeds

Transfer on Death (TOD) Deeds to Transfer a Home or Real Estate Upon Death

Real Estate Key IconIn a past Estate Planning post I discussed how beneficiary designations can be an effective tool to avoid Probate upon death. As a Wisconsin Estate Planning Attorney I often use a type of beneficiary designation to pass a home or other real estate to a person’s family members when that person dies. This beneficiary designation is established with a properly drafted Transfer on Death Deed, also known as a TOD Deed. A TOD Deed allows the owner of real property to execute a deed during his or her lifetime, which names the beneficiary or beneficiaries who will receive title to the property upon the owner’s death. This allows the real estate to be transferred to the beneficiaries without them having to go through the probate process.

Under our Wisconsin Statutes, an interest in real property that is solely owned, owned by spouses as survivor-ship marital property, or owned by 2 or more persons as joint tenants may be transferred without probate to a designated TOD beneficiary (as the term “beneficiary” is defined in the statute) on the death of the sole owner or the last to die of multiple owners. Therefore, it is important to know how the title to your property is held – the TOD deed process is not available for all interests in real estate.

A properly drafted TOD Deed does not affect ownership of the property until the owner’s death. The owner may still sell, mortgage, or transfer the property during his or her lifetime. Furthermore, the designation may be canceled or changed at any time by the recording of another properly executed deed that designates new beneficiaries, or no beneficiaries at all.

Under present Wisconsin law, there are no tax consequences with the execution of a TOD Deed. The execution of the deed is not considered to be a present or future gift, and no gift tax return is required. When the actual transfer takes place upon the death of the owner, a full step up in cost basis is realized, thereby eliminating or reducing capital gains tax when the property is ultimately sold by the new owner(s).

Given all of the advantages I’ve mentioned above concerning TOD Deeds, you may be wondering, what’s the catch? Well, there are a few potential disadvantages. For example, if you are considering using the TOD Deed method to transfer your property upon your death, it is important to understand that the transfer will be subject to any existing liens and encumbrances, including mortgages. Therefore, it is advisable to plan accordingly to ensure that your heirs do not end up straddled with a mortgage or other debt that they cannot afford.

When considering using a TOD Deed, you must also be certain that there is no conflict between the designation on your deed, and your other estate planning documents. It is important to work with a reputable Estate Planning Attorney to ensure that your estate plan is well planned and properly executed.

Also, if your TOD Deed names any minor beneficiaries to receive the property upon your death, a guardianship proceeding would be required and the court would appoint a legal guardian to administer and manage the property interest of each minor beneficiary until he or she attained the age of eighteen. In order to avoid this additional burden and cost, clients often choose other alternatives to the TOD Deed, such as a revocable living trust.

When using a TOD Deed it is also important to consider the consequences of the death of one or more of the named beneficiaries who has predeceased the owner of the property who executed the TOD Deed. Be sure to work with a qualified Estate Planning Attorney to ensure that the deed is drafted to address these types of contingencies.

In addition, if a TOD Deed provides that the property is to pass to multiple beneficiaries, it is important that the deed clearly address the form in which those multiple beneficiaries will hold the property. For example, will they hold as tenants in common, as joint tenants with right of survivor-ship, etc.  Each form of ownership has different characteristics and legal significance, and it is important to consult with an Estate Planning Lawyer to be certain these matters are fully considered and addressed. It is also very important to consider the complications that can arise when several beneficiaries end up owning fractions of a share of real estate with one another.

TOD Deeds can be a very beneficial tool to discuss with your Estate Planning Attorney. However, they are not the best solution for all clients, and they should never be used as a substitute when more comprehensive planning is warranted.

For answers to your questions about TOD Deeds and your other estate planning needs, contact attorney Stephen Kosa today at (715) 386-4125. He welcomes your call.