When you’re doing your estate planning, you’ll probably want to take steps to keep your house—likely your most valuable asset—out of probate. A living trust works well, but you may not want to go to the trouble of creating one. Joint tenancy isn't always the best option, either.
Here's good news: A growing number of states now offer an easy and effective alternative for real estate within their borders, and other states are considering adopting it. This alternative is called a transfer-on-death (TOD) deed or beneficiary deed. It's like a regular deed used to transfer real estate, with a crucial difference: It doesn't take effect until your death.
See whether or not your state is one of the states that allow transfer-on-death deeds.
Transfer-on-Death Deeds at a Glance
How TOD Deeds Work
Using a transfer-on-death deed is a lot like using a payable-on-death (POD) designation for a bank account. You name one or more beneficiaries now, who then inherit the property at your death without the need for probate court proceedings.
To name a beneficiary, you use a special kind of deed, one that's tailored to the law of your state. The deed looks pretty much like any other real estate deed; it names the current owner, describes the property exactly, and names the person the property will be transferred to. But a TOD deed contains an additional statement, making it clear that the deed does not take effect until the current owner's death.
The beneficiary you name to inherit the property doesn't have any legal right to it until your death—or, if you own the property with your spouse or someone else, until the last surviving owner dies. The beneficiary doesn't have to sign, acknowledge, or even be told about the deed.
In the deed, you can also name an alternate beneficiary who will inherit the real estate if your first choice isn't alive at your death. If you don't name an alternate, and your first choice doesn't survive you, state law determines who will inherit the property.
After you've signed the deed, you must record it with the local county land records office before your death. Otherwise, it won't be valid.
You keep complete ownership of and control over the property while you're alive. You pay the taxes on it, and it's not protected from your creditors. You can sell it, give it away, or mortgage it. Because the TOD deed does not make a gift of the property, there's no need to concern yourself with federal gift tax.
Later, if you change your mind about who you want to inherit the property, you are not locked in. You can revoke the TOD deed or simply record another TOD deed leaving the property to someone else.
Watch out for your state's special rules. Every state has its own rules about TOD deeds, and some of these may be important. Before you set off to prepare your deed, read your state's statute yourself or consult a knowledgeable lawyer—or do both.
At your death, ownership passes immediately—and automatically—to the beneficiary you named in the deed. Any mortgage or debt attached to the land goes along with it. There’s still some paperwork to get the property into the name of the new owner, however. The new owner will probably need to record a sworn statement (affidavit) and a copy of the death certificate. The process is definitely much simpler and quicker than probate.