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What are some problems with transfer on death deeds?
In this article, you will learn about:
Let’s dig in.
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Transfer on Death (TOD) deeds are also called beneficiary deeds.
They let a property owner choose a beneficiary.
This beneficiary inherits the property when the owner dies, skipping probate.
But TOD deeds aren’t perfect, and they can have issues.
Here’s a brief look at potential problems with transfer on death deeds:
TOD deeds only cover the property named in the deed.
This means that only this property can avoid probate.
Probate is a legal process where a court verifies a will and allows the distribution of assets.
If the owner has other assets like bank accounts, cars, or a second home, the TOD deed does not cover these.
They’ll need to go through probate unless the owner has arranged for them to avoid it in some other way.
In short, a TOD deed doesn’t help all the assets to avoid probate, only the specific property named in it.
A Transfer on Death deed has limited flexibility.
This means you can’t add special conditions.
For instance, you can’t state a beneficiary must reach a certain age before getting the property.
A living trust is more flexible because it lets you add such conditions.
In a TOD deed, the beneficiary immediately inherits the property once the owner dies, no matter their age or circumstances.
This lack of flexibility can sometimes cause problems.
Taxes can be a significant issue with Transfer on Death (TOD) deeds, like:
In a Transfer on Death (TOD) deed, the property owner can name more than one beneficiary.
After the owner’s death, these beneficiaries become joint owners of the property.
Here’s where problems can arise.
One beneficiary might want to sell the property and split the money.
Another might want to keep the property and live in it or rent it out.
If they can’t agree, it can lead to disputes.
This could cause tension within the family, leading to a legal battle to decide what to do with the property.
Sometimes, a court might need to step in to resolve the issue.
These family disputes are potential disadvantages of transfer on death deed.
Medicaid Estate Recovery is a process where the state tries to get back money it spent on Medicaid benefits for a person.
This happens after the person dies.
If the person who died owned property, the state might claim it.
They do this to recover the money they spent on the person’s healthcare.
This means the property might not go to the beneficiary named in the TOD deed.
Instead, the state could take it to pay off the Medicaid debt.
Read More: What Happens When Medicare Stops Paying For Nursing Home Care?
When a person dies, they might owe money to creditors.
These could be banks, credit card companies, or others they borrowed from.
This debt doesn’t just disappear when they die.
A Transfer on Death (TOD) deed lets a property pass to a beneficiary when the owner dies.
But the property isn’t free from the owner’s debts.
Creditors can claim the money they’re owed from the deceased person’s property.
This means they can ask for the property to be sold to pay back the debt.
So, if you inherit a property through a TOD deed, you might need to sell it.
The money from the sale can go to paying the debt.
You might owe the difference if the debt is more than the property’s value.
In short, a TOD deed doesn’t protect a property from the deceased person’s debts.
Read More: Can Someone Sell A House If Your Name Is On The Deed?
The TOD deed does not provide protections in the following situations:
A Transfer on Death (TOD) deed is a legal document.
Once you sign it, changing it can be hard because of the following reasons:
Read More: What Are My Rights If My Name Is On A Deed?
Here are other disadvantages of transfer on death deeds.
A Transfer on Death (TOD) deed can also apply to a property with a mortgage.
But a Transfer on Death (TOD) deed with a mortgage can lead to a few problems:
Read More: How Long Do You Have To Transfer Property After Death?
A Transfer on Death (TOD) deed can cause issues with capital gains tax.
Here’s how this can happen:
You might have to pay capital gains tax when you sell a property.
This tax is on the difference between the selling price and what you paid for the property.
That’s called the “gain.”
With a TOD deed, your beneficiary gets the property when you die.
The gain is large if the property’s value has gone up a lot since you bought it.
The good news is that in many cases, the law lets your beneficiary “step up” the cost basis.
That means the value at the time of your death becomes the new cost basis.
If the property is sold soon after, the gain might be small, so the tax might be low.
But if the property isn’t sold until years later, its value might increase even more.
Then the gain is larger when it’s sold, so the tax is larger, too.
Read More: Am I Entitled To My Husband’s Property If He Dies And My Name Isn’t On The Deed?
A Transfer on Death (TOD) deed can name multiple beneficiaries.
This means when the owner dies, several people inherit the property.
But this can lead to problems. Here’s why:
Read More: What Are My Rights If My Name Is Not On A Deed But Married
Let’s discuss potential tax issues with Transfer on Death (TOD) deeds:
Read More: What Happens To A House When The Owner Dies And There Is No Will?
Yes, a Transfer on Death deed can be contested.
Here’s how contesting a TOD works:
To contest a TOD deed, you’ll have to go to court.
There, you will need to present evidence to support your claims.
If the judge agrees with you, the TOD deed could be invalidated.
This means the property would pass according to the deceased person’s will or, if there isn’t one, the state’s laws.
Read More: What Happens When Two Siblings Own A Property And One Dies?
Here are other questions that clients ask us about problems with transfer on death deeds.
Yes, a Transfer on Death (TOD) deed does supersede a will.
When you die, the property in a TOD deed goes straight to the person you named.
It doesn’t matter what your will says about that property.
The TOD deed takes priority.
So, if your will says the property goes to person A, but your TOD deed says it goes to person B, person B gets the property.
Yes, a Transfer on Death (TOD) is considered an inheritance.
When a person dies, the property in a TOD deed goes to the named beneficiary.
This transfer is a type of inheritance.
The beneficiary gets the property when the owner dies, just like any other inherited asset.
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