A: Thank you for being a loyal subscriber to Ilyce’s weekly newsletter. We have talked about transfer-on-death instruments before. While we prefer that you have a living trust or other similar document to avoid probate, a transfer-on-death instrument can do the same thing.
Let's take a step back. When you own a home, that home is in your name. If you die, that home remains in the name of your estate and you need to transfer title to the home from your estate to someone else. If you die without a will, the laws in your state will dictate who should get your home.
As a basic example, the home would go to your spouse and children upon your death. If you are not married and have no children, then it would go to your parents and siblings.
The order of inheritance, and the method by which it gets carried out, depends on your state laws, but a probate court would have to become involved to process the transfer of the title. Here is the issue: You may not want your children to have to bear the cost of hiring an attorney and paying all the fees that going through probate will require. The idea is to avoid probate and not pay court fees and attorneys' fees to transfer title of your real estate to the people you already decided should get your home.
So what are your choices? If you have a will, the will allows your heirs to skip having your state laws decide who gets your property, but a will has to go through probate and you'll have all the expense, time and trouble of probate.
The next choice is to have a trust document. You would be the trustee of the trust, and you would also be the beneficiary of the trust. This means that you own and control the property but the title to the property would be in the name of the trust. Upon your death, the trust survives you and the trust document names a successor trustee to handle the affairs of the trust and a successor beneficiary that becomes the owner of the trust or any portion of property that is owned by the trust.
However, with a trust document, you usually have to hire an attorney to draft the trust document and transfer title of the home into the trust. Again, these are the very expenses you might be trying to avoid.
Several years ago, some states came up with the idea that a homeowner could record a deed on a property owned by that homeowner that designates who gets the ownership of the home upon the death of the homeowner. The concept is a good one, but some people don’t like the implementation of the concept. In your situation, you could sign and record a transfer-on-death document. If nothing changes in your life, the transfer-on-death instrument should transfer the ownership in the home from you to the person designated in your transfer-on-death instrument.
But here are some issues or problems with the way those documents work. The first issue is when a homeowner forgets they have executed a transfer-on-death instrument and later decides to bring a child onto title. That could just be a mess. The transfer-on-death instrument may no longer work, and the creation of the joint tenancy might have destroyed the transfer-on-death instrument, even if we don’t know whether the homeowner wanted her interest to go to the person in the transfer-on-death instrument.
Another issue that can be problematic is when the homeowner sells the home. It would seem that the transfer-on-death instrument would no longer be valid. If the homeowner has a mortgage and that mortgage goes unpaid, the lender forecloses and the lender’s actions would terminate the transfer-on-death instrument, as well.
You need to understand that transfer-on-death instrument is very limited under the narrow situations in which it would work.
Once you sign the document, you must make sure to set up a system for various contingencies. If you create the document for the benefit of your oldest child and the oldest child dies before you, you may not have provided for a contingent owner; so who should get the home on your death? Your grandkids, your child's spouse or your other children?
Again, the transfer should work and avoid probate if there are no changes in circumstances. That is, there were no changes to the ownership in the home since you executed the transfer-on-death document and the person designated in the transfer-on-death document is alive and willing to accept ownership to the home. If anything has gone awry, the transfer-on-death document could create more headaches than if you had died with a will and have to probate that will.
Think it through carefully, and then consult a good attorney.
Ilyce Glink is the author of “100 Questions Every First-Time Home Buyer Should Ask” (4th Edition). She is also the CEO of Best Money Moves, an app that employers provide to employees to measure and dial down financial stress. Samuel J. Tamkin is a Chicago-based real estate attorney. Contact them through her website, ThinkGlink.com.