Transfer on Death Deeds (TODD) are often seen as an easy solution to passing property to heirs without the hassle of probate. On the surface, they seem like a simple, no-fuss way to transfer real estate. But as with many quick fixes, the dangers of TODDs lie in what’s beneath the surface.
While TODDs can seem appealing, they carry significant risks that could leave your loved ones entangled in legal issues, financial loss, and even the need to sell a family home to pay for long-term care costs. If you're considering using a TODD as part of your estate plan, it's critical to understand the potential pitfalls.
In this article, we’ll uncover the hidden dangers of Transfer on Death Deeds, including how they fail to protect assets from long-term care costs, the legal complications they can create, and why they may leave your beneficiaries without critical homeowner's insurance coverage. Let's explore why this estate planning tool may not be as simple as it appears.
What is a Transfer on Death Deed?
Before we dive into the dangers, let's briefly explain what a Transfer on Death Deed (TODD) is.
A TODD allows a property owner to name a beneficiary who will receive ownership of the property when the owner passes away. Unlike a will, a TODD bypasses probate, meaning the property transfer occurs automatically at death without court involvement.
Sounds easy, right? However, as we’ll see, the simplicity of a TODD often comes at a steep price.
Danger #1: Transfer on Death Deeds Are Not Available in Every State
One of the first things to consider is whether a TODD is even an option in your state. Not all states recognize Transfer on Death Deeds, meaning they may not be valid in your location.
For example, states like Minnesota allow TODDs, but if you own property in a state where TODDs are not available — like Florida — your estate plan may not work as intended. Your heirs could face lengthy court battles, and the property could end up going through probate anyway; completely defeating the purpose of using a TODD in the first place.
Example: Mary’s Misstep
Imagine Mary, who owns property in both Minnesota and Florida. She sets up a TODD for her Minnesota home, but when she passes away, her Florida property must still go through probate since Florida doesn’t recognize TODDs. Her heirs face legal costs and delays despite her attempts to avoid probate.
If you own property in multiple states, it’s especially important to consult with an experienced estate planning attorney to ensure your plans align with the laws in each state.
Danger #2: Beneficiaries’ Spouses May Obtain an Interest in the Property
Many people believe that naming a beneficiary on a TODD will seamlessly transfer the property. However, this isn’t always the case. In some states, once the property transfers to the beneficiary, their spouse may obtain an interest in the property. This can complicate things when it comes time to sell, refinance, or make changes to the property title.
This is especially problematic if the beneficiary later divorces or passes away, as the spouse may have legal claims on the property. The spouse's signature may be required for future transactions, creating additional headaches.
Example: John’s Unexpected Roadblock
Let’s take John, for instance. John names his son, Alex, as the beneficiary of his home through a TODD. After John’s passing, Alex inherits the property. A few years later, Alex wants to sell the home but finds out his wife must sign off on the sale because she legally owns a portion of the property. Alex’s divorce complicates the process, leaving the home tied up in legal disputes for months.
Example: The Intransigent Spouse
In one particular instance, I had a family come into my office after the passing of their mom. Prior to her passing, another law firm had prepared a TODD transferring the property to her kids. However, one of her children’s spouses was now insisting that she would not sign off on any sale unless it was to her son and, because it was a family member, she was demanding that it be below fair market value. The family ended up needing to go to court to resolve their differences.
These scenarios can easily arise, in states like Minnesota and others where spouses automatically obtain a shared interest in assets acquired during the marriage. What starts as an attempt to simplify matters can quickly turn into a legal headache for your heirs. A well-drafted trust could have outlined the mother’s wishes clearly, avoiding these kinds of conflict. A TODD, on the other hand, leaves many decisions to the heirs, opening the door to disagreements.
Danger #3: No Protection from Long-Term Care or Nursing Home Costs
A Transfer on Death Deed may help avoid probate, but it offers no protection when it comes to long-term care costs. If you need to go into a nursing home or require extended care, Medicaid may have the right to place a lien on your property to cover these costs.
Unlike other estate planning tools, such as irrevocable trusts, a TODD does nothing to shield your assets from being used to pay for nursing home expenses. This means that when you pass away, the property could be sold to pay for care costs, leaving little or nothing for your beneficiaries.
Example: The Unprotected Home
Consider Helen, a widow who owns a home and uses a TODD to name her daughter, Sarah, as the beneficiary. Unfortunately, Helen later requires nursing home care. Because the TODD doesn’t protect the home from Medicaid claims, the state places a lien on it. After Helen passes, Sarah is forced to sell the house to satisfy the lien, leaving her without her inheritance.
By relying on a TODD, Helen unknowingly put her home at risk. Had she worked with an estate planning attorney to create a Medicaid Asset Protection Trust, her home could have been shielded, ensuring it would pass to Sarah as intended.
Danger #4: No Homeowner’s Insurance Coverage for Beneficiaries
One particularly overlooked danger of Transfer on Death Deeds is the risk of leaving your beneficiaries without homeowner's insurance coverage.
In the 8th Circuit Court of Appeals case, Strope-Robinson v. State Farm Fire and Casualty Company, the court ruled that homeowner's insurance coverage does not automatically extend to beneficiaries under a TODD. This means that if your beneficiaries inherit the property and something happens—such as a fire or natural disaster—they could be left without insurance protection, facing significant financial loss.
Example: The Uninsured Home
Here’s an example: Bob names his son, David, as the beneficiary of his home using a TODD. After Bob’s passing, David takes possession of the property but doesn’t realize that the homeowner’s insurance policy is no longer valid. A fire breaks out, causing significant damage. Since the insurance policy ended with Bob’s death, David is forced to pay out of pocket for repairs—costing him thousands. This is exactly what happened in the Strope-Robinson case.
This case highlights the critical importance of addressing insurance issues when using a TODD. Beneficiaries may not even realize they’re unprotected until it’s too late.
Danger #5: Potential for Conflicts Among Heirs
When you name a beneficiary using a TODD, you may unintentionally create conflict among your heirs, especially if the property is of significant value or has sentimental meaning.
While a TODD allows you to name one or more beneficiaries, it doesn’t always address how disputes will be resolved if heirs disagree over what to do with the property. Unlike a trust, which can provide detailed instructions, a TODD offers no guidance on how to manage the property after your death.
Example: The Sibling Dispute
For instance, a mother names her two children, Lisa and Mark, as beneficiaries on her home through a TODD. After her death, Lisa wants to sell the house, but Mark wants to keep it. The siblings argue over what to do, and the dispute escalates to court, delaying the resolution for months and damaging their relationship.
A well-drafted trust could have outlined the mother’s wishes clearly, avoiding these kinds of conflict. A TODD, on the other hand, leaves many decisions to the heirs, opening the door to disagreements.
Conclusion: Consider Safer Alternatives to Transfer on Death Deeds
While a Transfer on Death Deed may seem like an easy way to transfer property, the dangers often outweigh the benefits. From legal complications to the risk of losing insurance coverage and lack of protection from long-term care costs, a TODD can create more problems than it solves.
If you want to ensure your property passes smoothly to your heirs without putting them at risk, it’s critical to explore other estate planning tools. Options like revocable living trusts, irrevocable trusts, and enhanced life estate deeds offer far more protection and flexibility than a TODD.
Before making any decisions, consult with an experienced estate planning attorney who understands the complexities of both state laws and asset protection strategies. We can help you create a plan that protects your home and other assets, while also making life easier for your loved ones.
If you're considering a Transfer on Death Deed or want to explore safer estate planning alternatives, schedule a consultation today. Contact our office in Florida at (941) 909-4644, or Minnetonka, Minnesota at (763) 420-5087 to schedule a consultation. Alternatively, you can fill out the contact form on this page and a member of our team will reach out to you to schedule.
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