8 Problems With Transfer On Death Deeds You Need To Know

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:

• Only Covers Certain Assets : TOD deeds only apply to the property named in the deed. They don’t cover other assets.
• Not Very Flexible : TOD deeds don’t let you set conditions, like a beneficiary reaching a certain age before they get the property.
• Tax Issues : If the property’s value has gone up a lot, the beneficiary might owe a lot of taxes when they sell it.
• Can Lead to Family Fights : If there are multiple beneficiaries, they may disagree on what to do with the property.
• Medicaid Claims : If the owner got Medicaid, the state might take the property to pay back those benefits.
• Debt Problems : The property can be used to pay off the deceased owner’s debts. This might force the beneficiary to sell the property.
• No Protections : If a beneficiary dies before the owner or gets into financial trouble, this can create problems with the TOD deed.
• Hard to Change : It can be hard for the owner to change a TOD deed, especially if they become incapacitated.

Only Covers Certain Assets

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.

Not Very Flexible

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.

Transfer On Death Deed Tax Implications

Taxes can be a significant issue with Transfer on Death (TOD) deeds, like:

• Capital Gains Tax : If the property’s value has increased from when the original owner bought it, the beneficiary might face a capital gains tax when they sell. This tax applies to the difference between the original purchase price and the selling price.
• Inheritance Tax : Some states impose an inheritance tax on properties transferred through TOD deeds. This means the beneficiary may owe tax just for inheriting the property.
• Estate Tax : If the total value of the deceased’s estate is above a certain limit, an estate tax may apply. The TOD property is part of this estate and can contribute to pushing its value over the tax limit.

Family Disputes

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

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.

Debt Problems

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.

No Protections

The TOD deed does not provide protections in the following situations:

• Beneficiary Dies First : If a beneficiary dies before the property owner, the TOD deed doesn’t automatically pass to the beneficiary’s heirs. The property might end up in probate.
• Beneficiary Has Debt : If a beneficiary has significant debt when they inherit the property, creditors can claim the property to pay off the debt.
• Beneficiary’s Divorce : In a divorce, the property might be considered part of the beneficiary’s marital assets and could be divided.
• Other Ownership Issues : If a beneficiary gets into legal trouble or has issues that affect property ownership, the property could be at risk.

Hard to Change

A Transfer on Death (TOD) deed is a legal document.

Once you sign it, changing it can be hard because of the following reasons:

• When Healthy : You can typically change a TOD deed by creating and signing a new one.
• When Ill or Incapacitated : Changing a TOD deed can be difficult if you become seriously ill or mentally impaired. You might not be able to make legal decisions anymore.
• State Rules : Some states have rules about changing TOD deeds. You should notify your beneficiary or even get their agreement.
• Upon Death : The TOD deed cannot be changed if you die unexpectedly. It becomes effective as is. Any planned changes will not be possible.

Other Disadvantages Of Transfer On Death Deeds

Here are other disadvantages of transfer on death deeds.

Transfer On Death Deed With Mortgage

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:

• Mortgage Due-on-Sale Clause : Mortgages often have a “ due-on-sale ” clause. This clause means the full loan balance is due if the property is transferred. With a TOD deed, the bank might require payment of the full mortgage when the owner dies.
• Beneficiary’s Ability to Pay : The beneficiary gets the property when the owner dies. But the mortgage stays. The beneficiary has to pay the mortgage. If they can’t afford it, they could lose the property.
• Credit and Loan Issues : If the beneficiary wants to take over the mortgage, the bank may not allow it. They might check the beneficiary’s credit first. If the beneficiary’s credit is poor, the bank might not let them take over the loan.

Transfer On Death Deed Capital Gains

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.