So, families elect to sign transfer-on-death deeds to pass the family home to loved ones? This is often the focus of our talks with clients about what matters most to them.
However, passing the family home to heirs after death can be a complex process. Many states have created a new path for homeowners to document their wishes, using a “transfer-on-death deed”, also known as a “life estate deeds” However, according to a recent article from The Wall Street Journal, “When Leaving the House to Your Heirs Backfires,” this method is far from foolproof. It even describes the transfer-on-death deed (TODD) as a “blunt instrument.”
The complications of life can make the TODD a disaster waiting to happen. People make mistakes filling out the forms, heirs are disinherited, and the deed can conflict with the goals of the overall estate plan. Then it gets bad.
If the house is not paid for, the lender could call the loan under their “Due on Sale” clause, typically contained in mortgages.
One man named his niece as the beneficiary using a TODD. However, his ex-wife set the house on fire and destroyed it a few days after his death. The niece owned only the land and lost the battle to get any insurance proceeds for the house. The case went to court, and the judge determined that while the TODD form made the niece the sole owner, the uncle was the insured, so the insurance didn’t cover her loss.
This is admittedly a dramatic example. However, it’s one of many cases where what seems like a simple solution in estate planning becomes a complicated, expensive mess.
Many homeowners are considering selling their homes, which have soared in value, paying significant capital gains taxes, or giving them to their children tax-free after death.
Wills are used to instruct how property is to be distributed after death. After death, the wills are submitted to the court, which then supervises the transfer of assets through probate. Many people set up trusts to avoid having their assets go through probate. The trusts contain detailed instructions for how they want the property to be distributed.
The challenge with trusts is to ensure that they are funded; that is, the assets intended to go into the trust must be adequately retitled so the trust owns them. If the trusts aren’t funded, they don’t work. When created by an experienced estate planning attorney and with a capable trustee, trusts are an excellent way to transfer property. The Trust allows for the coverage of many more “What if…” scenarios.
Transfer-on-death deeds were created to avoid probate in a streamlined manner. When the owner passes, the beneficiary named on the deed can take direct ownership of the house, in much the same way named beneficiaries receive assets like 401(k)s or life insurance policies.
However, if any missteps occur, the results will not be what was intended. Homeowners can revoke a TODD at any time, which can undo whatever estate plan was created. If a TODD is used without being coordinated with the overall estate plan, problems can arise.
States are still making changes to these new deed laws because of cases like the owner’s ex setting the house on fire. In another case, a man is fighting for a 200-acre family farm left to him by his father, who was awarded the farm in a divorce settlement. The father made payments on a rent-to-own agreement with his maternal grandparents, which started in 1999. The grandparents stated that the TODD violated an anti-transfer provision in the contract and subsequently cancelled the contract. The Minnesota Court of Appeals agreed with the grandparents. The man has now lost the farm, despite more than two decades of payments made by both the father and son.
One last example and a reason to be wary of using a transfer-on-death deed: an 80-year-old man left his girlfriend a $700,000 house using a transfer-on-death deed. She got a surprise tax bill for $25,000 in estate taxes. She could have avoided the surprise if he had left her the house as a bequest in his will.
Talk with an experienced estate planning attorney about how to best transfer the family home and integrate it with the rest of your estate plan. Transferring such a sizable asset requires careful consideration to avoid unnecessary complications.
Reference: The Wall Street Journal (May 10, 2025) “When Leaving the House to Your Heirs Backfires”
