What Nobody Tells You About Transfer on Death Deeds | 4 Common Problems

Estate planning—like most financial topics—is one of those things that you’re expected to know, but no one really teaches you about it. And once you get started, things can get even more confusing with all the different tools.

Between wills, trusts, beneficiary designations, deeds, and other instruments, the options seem endless, yet all so similar. Transfer on death (TOD) deeds present one potential path. But while they offer some advantages, TOD deeds also come with some hurdles that should be discussed upfront.

TOD Deeds Offer Simplicity Now, But Sacrifice Flexibility Later

On the surface, TOD deeds provide a quick and cost-effective way to transfer real estate outside probate upon your death. You retain full control over the property during life, avoiding the more involved process of establishing a revocable living trust. However, this simplicity comes at a price.

Once recorded, the TOD deed cannot be changed or revoked easily. You lose flexibility should your circumstances or wishes change in the future. And if you need to sell or mortgage the property, your designated beneficiary must agree by signing off, even though they have no current ownership rights.

For those wanting to retain maximum flexibility and control, our estate planning attorneys generally recommend revocable trusts over TOD deeds. A modest upfront investment pays dividends through the ability to change beneficiaries, terms, and assets held in trust freely during your lifetime.

TOD Deeds Open the Door to Unintended Consequences

Even with the best intentions, TOD deeds can conflict with other estate planning documents and lead to unintended outcomes contrary to your wishes. For instance, your will may indicate one beneficiary should inherit a particular property, while the TOD deed names someone else. The TOD deed takes precedence in that case, overriding what’s in your will.

Without careful coordination, TOD deeds can also disinherit heirs you intended to provide for, result in unnecessary taxes, complicate matters for a surviving spouse, or cause other negative ripple effects. Once recorded, the deed is very difficult to undo.

To prevent conflicts, it’s critical to review your entire estate plan if considering a TOD deed. As your experienced estate planning partners, we take a holistic approach to ensure all aspects of your plan align with your goals and avoid inconsistencies.

TOD Deeds Leave Assets Exposed with Fewer Creditor Protections

Some assume that a TOD deed offers protection from creditors by transferring property immediately upon death without probate. However, assets transferred through TOD deeds do not receive the same creditor protections as those passing through probate or trusts.

Unless the TOD deed was executed years before death, creditors could allege a fraudulent transfer to defeat the deed. If the beneficiary is financially irresponsible, creditors can attach liens to the property.

For those concerned about creditor issues, our estate planning attorneys recommend utilizing trusts rather than TOD deeds. Trust assets remain shielded from creditors, avoiding complications down the road.

Beneficiaries Gain Property Tax Exposure After Transfer

When a property changes hands in North Carolina, it can trigger a reassessment of property taxes based on the new owner and current market value. Because TOD deeds transfer ownership immediately upon death, this tax reassessment applies. And some counties even levy an additional real estate transfer tax.

For beneficiaries on a budget, this increased property tax burden can present financial challenges. Proper estate planning strategies can help minimize the tax impacts when assets are transferred. Our attorneys guide clients through this process to prevent unwanted surprises.

What’s the Alternative? Revocable Living Trusts Offer Flexibility

For those seeking an estate planning tool that offers simplicity without sacrificing flexibility, we typically recommend revocable living trusts instead of TOD deeds. Living trusts allow you to retain full control over property during life, change beneficiaries at any time, shield assets from creditors, avoid probate, and minimize taxes.

Upon creation of the trust, you re-title assets like your home by transferring ownership from your personal name to the name of the trust. You continue managing the assets as trustee, and upon death, the designated successor trustees distribute assets directly to beneficiaries according to your instructions.

The modest initial investment in a living trust pays off through lifetime and after-death flexibility while avoiding the potential pitfalls of TOD deeds. Our estate planning attorneys can advise you on the best strategies that are tailored to your unique situation.

Take Control of Your Legacy − Consult Cary Estate Planning

Estate planning is not a one-size-fits-all endeavor. The best solutions come through comprehensive counsel and coordination, not simplistic forms. For over a decade, North Carolina families have trusted Cary Estate Planning to guide them through estate planning and craft customized plans that fulfill their legacy goals.

We invite you to schedule a consultation with our team. Together, we can ensure you have the right strategies in place to provide for your loved ones, achieve tax minimization, and establish the legacy you envision.

To get started on your path to estate planning confidence and peace of mind, call Cary Estate Planning or request an appointment through our website.