Here’s How a “TOD” Designation Can Simplify the Transfer of Your Home to Heirs Without Sacrificing Control
For most Americans, your home is likely your most valuable asset. In fact, for centuries, it has been the greatest source of inter-generational wealth transfer by a wide margin. This explains why many parents weigh the idea of designating their adult children as co-owners on the property's title as an estate planning mechanism.
Unfortunately, most stop short out of fear, and for good reason. Giving up financial control of such an important asset is a scary thought for many seniors. Thus, ensuring a smooth transfer of ownership to heirs while retaining full control during one’s lifetime is a common concern for older homeowners.
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For those not ready to add their adult children as co-owners of the property, a “Transfer on Death” (TOD) designation may be the ideal solution. This is a legal tool that can offer a simple and cost-effective way to pass your primary residence to your loved ones without the complications of probate or the risks that can arise from co-ownership.
A TOD designation, also known as a “beneficiary deed” or “TOD deed,” allows property owners to name a beneficiary who will automatically inherit a property upon the owner's death. During the owner’s lifetime, the deed remains in their name alone, giving them complete control over the property. Only after the owner's death does the title transfer to the designated beneficiary, bypassing the probate process entirely.
Unlike a will, which must go through probate, a TOD designation allows for a more streamlined transfer of ownership. This is often as simple as recording the deed with the appropriate local government agency, such as your county’s recorder of deeds and naming your intended beneficiaries.
One reason homeowners should consider a TOD designation is to avoid the complexities and risks that can come with adding their future heirs as co-owners on the deed today. While adding your children may seem like a straightforward solution to ensure the property passes to them as intended, it comes with serious drawbacks during your lifetime.
When you name someone as a co-owner of your home, they receive the same legal rights to the property as you. This means that their decisions can directly impact you. For example, if your child is listed as a joint owner and later experiences financial trouble, creditors may be able to pursue a claim against their share of the home. Similarly, disputes over property decisions such as renovations, refinancing, or selling may arise if you and your co-owner have conflicting opinions.
Additionally, transferring ownership by adding heirs to the title may trigger gift tax implications depending on the property’s value and your overall net worth. With a TOD, there is no transfer during your lifetime, so these potential tax issues are avoided.
One of the primary advantages of adding your heirs to a property’s title is that it allows them to bypass probate, which can also be accomplished with a TOD designation. Probate can be a lengthy and expensive process that typically involves court filings, administrative delays, and legal fees, which can eat into the value of an estate.
Another key benefit of a TOD designation is that it allows homeowners to retain full control of the property during their lifetime. Unlike co-ownership, which creates immediate rights for the other party, a TOD beneficiary has no rights to the property until the owner passes away. This means that as long as you are alive, you can sell the property, refinance it, take out a home equity loan, or even revoke the TOD designation without needing the beneficiary’s permission.
This flexibility can be particularly valuable in situations where relationships change or where circumstances evolve over time. It allows the homeowner to maintain full control over property decisions while keeping a clear, structured plan for transferring the asset to heirs when the time comes.
It is important to note that TOD designations are governed by state law, and not all states permit them. As of this writing, more than half of U.S. states allow TOD deeds, but the rules and procedures for creating and revoking them can vary. In states that do not permit TOD deeds, other estate planning tools—such as a revocable living trust—may offer similar benefits.
If you are considering a TOD designation, it is important to consult with an estate planning attorney who is familiar with the laws in your state. They can help ensure that the deed is properly executed and recorded and that your overall estate plan is aligned with your goals.
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Malcolm Ethridge, CFP® is the Managing Partner at Capital Area Planning Group, based in Washington, D.C. He is also the Managing Partner of Capital Area Tax Consultants.
Malcolm’s areas of expertise include retirement planning, investment portfolio development, tax planning, insurance, equity compensation and other executive benefits.
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Disclosures:
The information provided is for educational and informational purposes only, does not constitute investment advice, and should not be relied upon as such. Be sure to consult with your legal advisors before taking any action that could have tax and legal consequences.
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