When it comes to estate planning, many people look for the easiest way to pass on their assets to loved ones. One of the more popular, but often misunderstood, tools is the Transfer on Death Deed (TODD). TODDs allow homeowners to designate beneficiaries who will inherit their property after they pass away, without the need for probate. It sounds simple, right?
But like many things that seem too good to be true, TODDs come with their own set of risks and limitations. On the other hand, trusts—while a bit more complex upfront—can offer far greater protection, flexibility, and control over how your estate is handled.
In this article, we’ll dive deep into the differences between Transfer on Death Deeds and trusts, discussing why a trust may be a better fit for many families. We’ll also explore how both options work and give examples to help illustrate key points.
What is a Transfer on Death Deed?
A Transfer on Death Deed (TODD) allows you to name one or more beneficiaries who will automatically inherit your real estate when you pass away. It bypasses probate, the court process typically required to validate a will and distribute property after death.
Sounds easy enough, right? It can be, especially if you’re trying to avoid the costs and delays of probate. The TODD becomes effective upon your death and doesn’t require any immediate legal fees beyond recording the deed.
But as simple as it may sound, TODDs often have hidden risks that can create complications for your beneficiaries.
Example: The TODD Trap
Let’s consider the case of Sarah. Sarah used a TODD to leave her home to her daughter, Emily. After Sarah’s passing, Emily inherited the home, but a few months later, Emily found herself in a difficult spot. Unbeknownst to Emily, her husband, who she is separated from, had a legal interest in the property, requiring his approval to sell the house. On top of that, Medicaid placed a lien on the property for Sarah’s nursing home costs. Emily was forced to sell the home just to cover these expenses. The easy estate planning tool Sarah thought would help her daughter ended up creating a bigger mess than anticipated.
This is just one example of how TODDs can backfire, especially when compared to the more robust protection a trust offers.
What is a Trust?
There are two primary types of trusts:
- Revocable Living Trusts: You remain in control of the assets during your lifetime, and the trust can be changed or revoked as needed.
- Irrevocable Trusts: Once created, the assets are no longer under your control, but this type of trust can offer more protection from creditors, lawsuits, and long-term care costs.
Unlike a TODD, a trust can include multiple types of assets, not just real estate. It can also set specific conditions for how and when your beneficiaries receive their inheritance.
Example: The Power of a Trust
Now let’s look at John, who set up a revocable living trust. John placed his home, bank accounts, and some investments in the trust. Upon his passing, his children inherited the assets as outlined in the trust agreement, with no need for probate. Plus, because John’s trust was revocable, he had been able to make adjustments throughout his lifetime as his family’s needs changed.
Key Differences Between Transfer on Death Deeds and Trusts
Let’s break down the key differences between TODDs and trusts, and explore why a trust may be the better option for your estate planning.
1. Availability of Trusts
Transfer on death deeds are not available in all states. Trusts on the other hand are recognized in all states. This can be of particular concern for people that may own property in a state that allows TODDs and property in another state that doesn’t.
2. Flexibility and Control
A TODD is a one-size-fits-all tool. Once you name beneficiaries, the deed automatically transfers ownership to them upon your death. You can revoke or change the TODD during your lifetime, but that’s about the extent of control you have.
In contrast, a trust gives you far more flexibility and control. With a revocable living trust, you can change the terms, add or remove beneficiaries, or even dissolve the trust if your situation changes. You can also establish specific instructions, like setting up conditions for how and when your beneficiaries will receive assets. This is particularly helpful for those who want to protect young or financially inexperienced heirs.
3. Avoiding Probate and Keeping Your Estate Private
Both TODDs and trusts are used to avoid probate. However, a trust offers more comprehensive benefits in this area.
- TODD: Only real estate listed on the TODD avoids probate. If you have other assets—like bank accounts, investments, or personal property—they will still need to go through probate unless additional steps are taken.
- Trust: A trust allows you to transfer virtually all types of assets—including real estate, bank accounts, and personal belongings—into the trust, ensuring a smooth transition for your beneficiaries.
Another important consideration: probate is a public process. Anyone can access probate records, meaning the details of your estate and your beneficiaries become public knowledge. Trusts, on the other hand, keep your entire estate private. If privacy is important to you, a trust is the way to go.
4. Protection from Creditors and Divorce
One of the biggest pitfalls of using a TODD is the lack of protection it offers. A TODD does nothing to protect the property from creditors or lawsuits. Once your beneficiary inherits the property, it becomes part of their estate, which means it’s open to claims from creditors or even divided in a divorce.
How would you feel if you found out that your son or daughter lost their share of your home and life savings in a divorce?
Compare that to a trust. With the right provisions in your trust, you can protect your home and all of the other assets you leave for your family in the event that they get divorced or sued, or even from bankruptcy due to a job loss or medical emergency.
Example: Trust vs. TODD for Protection From Divorce and Creditors
Consider Sarah again who, rather than leave her home to her daughter Emily with a TODD, instead put it into a trust, along with her checking, savings and investment accounts. Sarah set up her trust so that when she passed away, it continued in trust for Emily’s benefit. Emily was the successor trustee and could access the money in it when she needed to. However, when she and her husband got divorced, the terms of the trust were such that her Emily’s husband could not claim an interest in it and, when she sold Sarah’s home, he did not have to sign off on it.
5. Protection from Nursing Home and Long-Term Care Costs
If you need long-term care or to go into a nursing home and Medicaid is involved, your home could be at risk with a TODD. Medicaid can place a lien on your property to recover those costs.
However, with the proper trust, your property could be protected from those claims.
Example: Trust vs. TODD for Asset Protection
Consider Lisa, who set up a Medicaid Asset Protection Trust to protect her home and other assets. When Lisa later needed nursing home care, her home was safe from Medicaid claims. Compare this to Mike, who used a TODD. After Mike passed, Medicaid placed a lien on his house, leaving his heirs with no choice but to sell the property to pay off the nursing home bills.
6. Dealing with Insurance Coverage
A less obvious but equally important issue with TODDs is insurance coverage. In the case of Strope-Robinson vs. State Farm, the 8th Circuit Court of Appeals held that homeowner’s insurance doesn’t automatically extend to beneficiaries inheriting property through a TODD. This means that if the home is damaged or destroyed after the transfer, the new owners may be left without insurance coverage unless they act quickly to get a new policy in place.
The case arose in Minnesota and the state later passed a law to extend coverage for thirty days after your passing. However, it is only for 30 days, requires notice to the insurance company, may still be an issue in other states, and doesn’t solve the other issues with TODDs
Trusts don’t have this issue. Since the property is already owned by the trust, the trustee can maintain insurance coverage, ensuring there are no gaps in protection.
7. Handling Multiple Beneficiaries and Avoiding Conflict
If you have multiple beneficiaries, a TODD can create confusion and even conflict. Let’s say you name more than one child as a beneficiary. Upon your death, they all inherit the property jointly. If they can’t agree on what to do with it—sell, keep, or rent it out—it can lead to disputes that may require court intervention.
To complicate things even more, depending on the law of your state, your children’s spouses will also likely receive an ownership share. Yes, you heard that correctly, in many states, spouses automatically have an ownership interest in any real estate owned by their spouse even if they are not named on the deed. That means your kid’s spouses will also likely have to sign off on any sale or agree to what happens with the property.
Several years ago, a family contacted my office after the passing of their mom. She had worked with another law firm to prepare a TODD transferring the property to her kids. However, one of their sibling’s spouses was now demanding the property be sold to her son for less than fair market value and was refusing to sign off on any other sale unless the rest of the family agreed to her terms. The family ended up needing to go to court to resolve their issues.
With a trust, you can appoint a trustee who manages the property according to your instructions, reducing the potential for conflict. You can also include provisions that specify how and when the property is to be sold or divided, making things much clearer for your heirs.
Example: The Family Feud
Picture a family where two siblings inherit their mother’s house through a TODD. One sibling wants to sell the house, but the other insists on keeping it. The disagreement drags on, eventually leading to a lawsuit that costs them both time and money. Had their mother used a trust, these issues could have been avoided by clearly outlining her wishes in the trust document.
Conclusion: Why a Trust is Often Better Than a Transfer on Death Deed
While Transfer on Death Deeds may seem like a quick and easy fix for estate planning, they often fall short when compared to the robust benefits of a trust. In fact, I do NOT RECOMMEND TODDs as I believe the risks far outweigh the benefits. Trusts provide much more flexibility, control, and protection for both you and your beneficiaries. They allow you to avoid probate, protect your assets and better ensure your wishes are carried out exactly as you intend.
If you would like to discuss your goals for your planning and how we can work with you to custom tailor a plan to achieve them, call us today at (941) 909-4644 for our Florida office, or at (763) 420-5087 for our Minnesota office, to schedule a consultation. Or, you can fill out the contact form on this page and a member of our team will reach out to you to schedule.
Or, if you are not yet ready to schedule your consultation and would like to learn more, here are some additional resources for you:
To learn more about how to protect your home and life savings from long-term care and nursing home costs, download your copy of my book, "Save Our Home". Click here to get your copy.
Join us in my masterclass where I reveal strategies I use with my private clients and their families to help them avoid probate, wills v. trusts, how to save on taxes, how to protect the money they leave for their kids in the event they get divorced, and much more. Click here to sign up and join us.
Join us in my masterclass where I reveal strategies I use with my private clients and their families to help them protect their home and life savings from long-term care and nursing home costs. Click here to sign up and join us.
