What we own in life must be divided among the living when we die. It’s one thing to carry our favorite necklace or a wedding ring into the earth, but another to cling to the family home or the vintage convertible.
The purpose of a last will and testament is to put a person’s wishes, regarding the fate of their belongings, in writing. A will can determine who gets the house, who gets the accounts, who gets control of the business (or your majority shares), and who gets the car.
But wills are not always the most efficient way of distributing what we own. A will must go through the probate process and depending on the size and complexity of the estate you plan to leave behind, probate can be a hefty logistical and financial burden on your family.
Avoiding a lengthy probate process – by minimizing your probatable estate and exploring alternatives – can help you distribute your inheritance much more smoothly. One important tool for doing so is the transfer on death deed.
What is a Revocable Transfer on Death Deed?
A revocable transfer on death deed is a document that effectively names a designated beneficiary for an asset you own. It is revocable by the person creating it, also known as the grantor of the interest. This means you can create a revocable transfer on death deed on an investment property for your eldest, then change your mind, and amend the document – or revoke it entirely, and craft a new one.
Upon your death, that designated beneficiary will become the automatic new owner of your asset. There are multiple benefits to this.
First, this bypasses probate. Probate essentially revolves around scrutinizing an estate in a court, as a matter of public record, to ensure that all assets are accounted for and distributed according to an existing last will – or according to state intestacy laws, in the absence of a will. No probate means the asset in question is distributed to your loved one expeditiously.
Second, it is a relatively simple document to create and notarize. A deed is no more than a few pages, indicating the grantor’s name and address, the parcel number of the local assessor under whose jurisdiction your property exists, the legal description for the property, and the full name of your beneficiary, as well as their relationship to you (i.e., son, daughter, cousin, niece, close friend, father-in-law, etc.). This document is dated, signed in front of a notary public, and filed with the local county recorder.
Third, transfer on death deeds allows for an adjustment in the basis of a property. Say, for example, that you bought a home at a time when it was worth $250,000. Now, many years later, it is valued at $1.2 million – because of changes in the neighborhood, changes in the housing market, and inflation.
Selling that property would incur a significant capital gains tax. However, passing it on to a loved one via a transfer on death deed will change the property’s basis in the ownership of your beneficiary. This means the new adjusted basis for the property is its value on your date of death, and if they choose to sell it immediately thereafter, they pay nothing in capital gains taxes.
Of course, the entirety of your estate may still be subject to state and federal estate taxes (depending on the size of the estate), or state inheritance taxes (in some states).
Finally, a transfer on death deed is an easy way to transfer your assets to your loved ones. There are other, more complicated ways, each with their own set of benefits and considerations. Whenever applicable, you may want to consider designating beneficiaries to your properties and accounts. Do note, however, that you will need to keep track of these designations, especially as the years go by, and your relationships with your family change and are affected.
When is a Revocable Transfer on Death Deed Helpful?
A revocable transfer on death deed is helpful whenever it is applicable to your specific situation – that is, whenever you have a property that can be transferred via a TOD deed, and beneficiaries that you wish to have full ownership over your property on the moment of your death.
You cannot put any and every piece of property in a transfer on death deed. First, it must be real estate. There are other types of TOD deeds applicable for vehicles, and bank accounts are transferred to designated beneficiaries via a payable on death clause.
Of course, it’s more work putting each major piece of property in a TOD than describing your entire estate plan via a will, a trust, or both. A TOD may have a place in your estate plan as the ideal method for transferring a specific piece of property to a loved one when you die, with little to no complications.
Recent Changes to Revocable Transfer on Death Deeds in California
California enacted Senate Bill No. 315 in September 2021, which, among other things:
- Extends the sunset date on the effectiveness of new TOD deeds from January 1, 2022, to January 1, 2032.
- Redefines terms such as “beneficiary”, “real property”, “subscribing witness”, and “unsecured debts”.
- Amends how a revocable TOD deed is enacted and revoked.
- Adds additional provisions for executing and revoking a TOD deed.
- Requiring that beneficiaries serve a prescribed notice on the transferor’s heirs, after the death of the transferor (grantor).
The changes are listed more specifically here.
Creating a Transfer on Death Deed
While it is a simple document to create, it is also a very important one. Avoid clerical errors and state-specific nuances in both language and terminology by staying away from DIY templates and talking to an experienced estate planning professional instead.
An estate planning professional will be able to help you to not only craft the right TOD or POD for your property, asset, or account, but may assist you in coordinating and creating your entire estate plan, in general.