The Wealth & Wisdom Blog

As in many other areas of life, a minimalist approach to estate planning is generally a good idea.  All of us wish to take the most cost-efficient strategy to achieve a certain outcome.  However, some planning strategies present the appearance of efficiency now but create more legal, tax or relational complexities later.  In this month’s update, I outline the benefits of a transfer on death deed for residential real estate and then explain why using a revocable trust is generally a preferable approach for transferring residential real estate.

A transfer on death deed (“TODD”) allows a current owner to register a legally-binding directive with the county records department that transfers the property to a new owner upon the death of the current owner.  A TODD is often likened to a beneficiary designation on a retirement account; indeed, some consider it as a cheaper and easier way of avoiding probate proceedings than a revocable trust. In my experience, however, the risks and additional hassles of using a TODD that arise in the future outweigh the immediate minimalist benefit to the current homeowner.

Briefly, these hassles are as follows:

• Multifaceted Use. Most of our clients will move from their current residence at least one more time before they die.  A TODD only works if the client dies in their current home; a TODD won’t work for a subsequently acquired property.  A revocable trust, in contrast, can be used to own the current property, and then replacement property.  When clients sell a primary residence and decide to rent, the sale proceeds can then be titled in a bank or brokerage account in the name of the trust.
• Administrative Hassles. If the property is designated by TODD to multiple owners at death, all the new owners become the co-owners following death of the homeowner. All of the new homeowners must agree to ongoing ownership decisions following the death of the homeowner, including the management of the property and the sale.  Once all the new owners agree to sell the property, under Minnesota real estate law each of the new owners as well as their spouses must all sign a deed in agreement to the sale.¹ In contrast, if a property is owned by a revocable trust, only one lonely trustee would be required to sell a trust-owned residence.
• Liability Coverage. When beneficiaries inherit a home through a TODD, they have 30 days from death to obtain insurance coverage.² Most families would prefer not to have to deal with insurance coverage within 30 days of their loved one’s death.  When a trust owns a property, the trust has an “insurable interest” in the property, and so coverage continues after the death of the trust creator.
• Flexibility in Use of Sale Proceeds. Since a TODD directs ownership directly to beneficiaries at death, the beneficiaries can simply take the proceeds.  The beneficiaries of a TODD do not need to set aside sale proceeds for outstanding debts and expenses. ³  In contrast, the sale proceeds from a trust-owned residence can be used to pay for last expenses and debts with remaining amounts used to fund specific gifts to charities, children, and other family members.
• Disorder of Deaths. Finally, state statute dictates an arrangement for how the residence subject to a TODD should be distributed if one or more of the named beneficiaries dies before the property owner.  While the statute may (or may not) yield the desired result, in no event would the share allocated to grandchildren be managed in a testamentary trust for the benefit of such grandchild.  A revocable trust, in contrast, can create a customized approach for the benefit of younger generations.

We must be careful to consider a minimalist approach in our estate planning strategies.  The TODD strategy is in danger of being a Trojan Horse; that is, a planning strategy that has the appearance of efficiency but in many circumstances will yield greater complexity to the families following death.