A Transfer-on-Death (TOD) Deed may seem like a straightforward way to pass real estate to a loved one without probate. However, avoiding probate for one property is not the same as having a complete estate plan. For many people, relying on a TOD Deed alone can leave important planning needs unaddressed. A Revocable Living Trust, as part of a complete estate plan, offers broader options for managing assets during life and distributing them after death.
A TOD Deed Has a Narrow Purpose
A TOD Deed generally names the person or people who are to receive specified real estate when the owner dies. If properly prepared and valid under the applicable state law, it can allow that property to pass outside of probate. However, its scope is limited to the real estate identified in the deed. It does not, by itself, create a plan for a person’s bank accounts, investments, personal belongings, or other assets. A TOD Deed also does not address incapacity concerns of either the owner or their beneficiaries, does not provide multiple layers of contingent beneficiaries with instructions for each type of beneficiary, nor does it provide asset protection for the beneficiaries.
A Living Trust can be designed to hold different kinds of property, making it easier to coordinate how multiple assets are managed and ultimately distributed. By retitling assets like real estate, bank accounts, and investment accounts to a trust, these assets can be managed for the grantor as well as their future beneficiaries. A trust can also be the beneficiary of assets like life insurance so that the management and distribution of all of a person’s assets can be coordinated efficiently, outside of probate court.
A Living Trust can also name multiple alternate beneficiaries to create a multi-generational plan for property and can include detailed instructions for different ages, stages, and legacy purposes. Instead of listing a beneficiary or beneficiaries to inherit outright at the moment of death like a TOD Deed, a Living Trust can specify multiple layers of contingent beneficiaries in case the first person or persons do not survive the owner. That way, probate is avoided not only if the primary beneficiary survives, but also if multiple tragedies strike. A trust can also provide that assets be held for a beneficiary until a specified age or used for certain purposes. These provisions can be particularly relevant when planning for minor children or beneficiaries who may need ongoing assistance managing an inheritance.
A Living Trust can also include asset protection for beneficiaries, and certain types of trusts can also protect the property owner. For example, if a beneficiary is going through anything at the time they inherit, such as a divorce, a tax issue, a lawsuit, a creditor issue, or bankruptcy, the property they inherit through a TOD Deed would be subject to creditor attachment as soon as it is inherited. If that asset were instead held in a trust with spendthrift provisions or even more robust asset protection provisions, it could be protected from third parties trying to go after your beneficiaries’ assets. Certain types of trusts have that protective benefit for the property owner as well.
A Living Trust can also address incapacity concerns for the property owner and their beneficiaries. A trust can identify a trustee and a successor trustee to manage trust property. A successor trustee can take over management from the grantor, who is generally the initial trustee of a Living Trust, if the grantor becomes incapacitated or dies. A Power of Attorney and Health Care Directive can work with the trust to create a complete estate plan that addresses the many concerns incapacity can bring. This type of plan can eliminate the court process known as Guardianship, where a judge has to decide who can manage the assets and care of a person who becomes incapacitated due to illness or accident. A trust can also include language to protect beneficiaries who are or become incapacitated and are receiving government support at the time of inheritance. A trust can distribute assets for that beneficiary’s supplemental needs so they do not lose benefits by inheriting a lump sum or property outright through a TOD Deed.
A TOD Deed may be useful in certain circumstances, but it should not automatically be treated as a substitute for a broader estate plan. Although a TOD Deed is often simpler and less expensive to prepare than a Living Trust, choosing a document based on cost or convenience alone may leave important questions unanswered. Reviewing your circumstances with an estate-planning professional can help you determine whether a Living Trust, a TOD Deed, or a combination of documents best fits your needs.
Adams Law Office, LLC can help you explore estate-planning options and understand how your documents can work together. Schedule a complimentary 15-minute discovery call to discuss your estate-planning goals.
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