Common Problems with Deeds on Death, Transfer on Death Deeds, and Beneficiary Deeds
A deed on death, transfer on death deed, or beneficiary deed is a type of deed that transfers ownership of real estate when someone dies—all while avoiding probate. While a transfer on death deed can be a very beneficial estate planning tool, it is important to understand how this deed works and the potential drawbacks to using this deed.
How Transfer on Death Deeds Work
If you own commercial or residential real estate without a co-owner, there are only a few ways that you can pass on this property to family, friends, or charities without having to go through probate. Many people choose to utilize a living trust to avoid probate when transferring real property. However, a deed on death, transfer on death deeds, or beneficiary deeds are simpler and less expensive when simply looking to transfer real property to a beneficiary.
A transfer on death deed allows you to sign the document immediately and move your property from your name to the name of the beneficiary. However, the deed is not valid or take effect until you pass away. This is beneficial as a transfer on death deed allows one to maintain control of their property throughout the entirety of their lifetime. Further, as the beneficiary has no legal right to the property until after you pass away, you retain the right to refinance or sell the property.
One important note is that you must record the deed with the county land records office in the same district as the property. Thus, if you change your mind about leaving the property to a beneficiary, you can simply revoke or create a new deed to cancel out the old deed.
Finally, since you are not transferring the property during your lifetime, the deed does not incur a gift tax. However, the value of the property does contribute to the value of your estate for tax purposes.
Problems with Transfer on Death Deeds
While a deed on death, transfer on death deed, or beneficiary deed can be a low cost and simple way to avoid probate when transferring real property. However, there are a few common issues with transfer on death deeds that are outlined below.
Transfer on Death Forms or Deed Upon Death Forms
Many people find free transfer on death deeds templates online. However, these documents can often be unreliable and when combined with inexperienced grantors who may use incorrect language, the transfer on death deed will not be effective. While not an issue with the deed itself, utilizing a free deed without an attorney’s help so commonly leads to problems that it must be addressed.
Difficult to Get Title Insurance
Most title insurance companies refuse to issue a title insurance policy until the new property owner owns the property for at least eighteen months. This means that you have to wait eighteen months after the original owner of the property to die before obtaining title insurance on the property. The reason for this is because creditors have eighteen months to file credit claims against the estate.
If the beneficiary inheriting the property desires to sell the property as soon as possible, the new buyer may not be able to obtain title insurance on the property and thus will have problems obtaining a mortgage to purchase the property.
In most cases, probate can fix this issue. However, the whole point of using a transfer on death deed is to avoid probate in the first place.
Vulnerability to Claims by Grantor’s Creditors
As stated above, the grantors creditors have 18 months to make a claim against the estate. The grantor can petition the court to shorten the claim period. However, it would require the estate to open a probate claim. The reason you want to use a transfer on death deed is to avoid probate in the first place. So this would be an undesirable situation anyway.
Vulnerability to Claims by Beneficiary’s Creditors
In addition to making a claim on grantors assets, creditors can make a claim on the beneficiary’s new real property. For example, a beneficiary going through a divorce, bankruptcy, insolvency, or large legal judgment against them, the related creditors can attach claims to any property that the beneficiary is inheriting. Most beneficiaries choose to sell or rent the property once they inherit it. Thus, many beneficiaries cannot use the homestead declaration and exemption. However, if the beneficiary plans on using the property as their main residence, the homestead defense may be applicable.
Real Property Transfer Taxes
When the grantor dies and the deed is recorded, there is no initial real estate transfer fee. However, when the new property owner files the death of grantor affidavit, there will be a real property transfer tax. This can be a large downside especially if the property being transferred is expensive. One way to avoid these taxes is to use a living revocable trust. The reason for this is that the beneficiary to this trust will not need to pay real property transfer taxes.
Beneficiaries do not Handle Contingencies Well
Another issue with transfer on death deeds is that they do not provide workaround contingencies the way a trust does. For example, a trust will allow someone to leave property to a beneficiary. However, if this beneficiary dies before they inherit the assets, the property passes on to that person’s closest surviving relative. This most commonly includes their children or spouse. Further, in the scenario outlined above, if a child inherits the property, the trust can hold the property. That is until the inheriting entity turns a certain age or meets other criteria. Transfer on death deeds do not allow for this same luxury. Instead, the deed gives the surviving relative the asset as soon as the grantor of the property passes away. This could lead to many problems especially if the new beneficiary is young and not careful with their money.
Not every family needs to hire a probate attorney after the loss of a loved one. However, because each state has specific laws and procedures tied to probate, finding correct and relevant information is difficult. By hiring a probate attorney, you are enlisting someone with knowledge of the state-specific laws. Furthermore, you will also have someone on your side to help you deal with potential creditors. Finally, a probate attorney will be able to help you distribute the assets in the most tax-efficient way.
Finally, a probate attorney is helpful in assisting with marshaling and valuing all the estate assets, assisting with finishing the accounting, completing the estate tax returns (death tax returns), and overseeing the asset distribution process. Most importantly, however, a probate attorney can asset the personal representative with preparing the initial pleadings to open the estate. A probate attorney can also help to guide the personal representative through their fiduciary obligations and important deadlines.
Contact our law office for more information
For more on problems with deeds on death, transfer on death deeds, or beneficiary deeds, contact Antonoplos & Associates at 202-803-5676. You can also directly schedule a consultation with one of our attorneys.