A Transfer on Death Deed is a powerful estate planning tool that allows property owners to pass real estate directly to beneficiaries without the need for probate. In this blog post, I’ll explore what a TOD deed is, how it works, when it’s helpful, and — most importantly — why you are probably better off using the probate process in Washington State.
What is a Transfer on Death Deed?
A Transfer on Death deed (TOD deed) is a legal document that allows property owners to designate one or more beneficiaries who will receive their property upon the owner’s death. The property remains under the owner’s control during their lifetime, and the TOD deed (if properly drafted) can be revoked or changed at any time.
How does a TOD Deed work?
Creation and Filing: The property owner creates a TOD deed, naming the beneficiaries who will inherit the property upon their death. This deed is signed, notarized, and recorded in the county records office prior to their death to be valid.
Control During Lifetime: The property owner retains full control over the property while they are alive. They can sell, mortgage, or lease the property without the consent of the beneficiaries.
Automatic Transfer: Upon the owner’s death, the property automatically transfers to the named beneficiaries without the need for probate. The beneficiaries simply need to file the owner’s death certificate with the county recorder’s office to update the property title.
“Benefits” of a Transfer on Death Deed
Much of the information you’ll read on the internet about TOD deeds comes from outside Washington State. The main benefit that most online sites assert is that a TOD deed will allow you to “avoid probate” and thus it is more time- and cost-effective.
While it is true that a TOD deed will allow you to avoid probate, it is often a lengthier and more expensive process than probate. Let me explain.
The Bad News
Under RCW 11.18.200, beneficiaries of nonprobate assets takes assets from the deceased loved one subject to the decedent’s liabilities, claims, estate taxes, and estate administration costs. Nonprobate assets include property that passes pursuant to a community property agreement, joint tenancy with right of survivorship, payable-on-death accounts, transfer-on-death deeds, transfers pursuant to the decedent’s revocable trust, life insurance benefits, and even pension or retirement benefits, and more.
If notice is not given to creditors that the decedent has died (perhaps because the beneficiary of a nonprobate asset didn’t consult with an attorney), then creditors have a two-year period to make claims against the estate. Two years.
Why is this “Bad News”?
Often, clients want their loved ones to be able to sell their real property as quickly as possible. However, it is rare that the new owner can get title insurance to cover the sale of real estate during the two years following the death of the original owner because of the two year creditor claim period. This means your loved ones can get “stuck” with your house, waiting to see if anyone claims that you owe money, before they can liquidate it. Worse, sometimes they can get title insurance, are able to sell the house, and then 12 months later, they get notice of a creditor claim and have to pay it (and hopefully the funds are still available, or they are personally liable for the claim).
What is the other option?
Probate. Let’s imagine this same situation, but instead of a transfer on death deed, the original owner left the house to their loved one in a will. Currently, it costs less than $300 to open probate and petition for the Personal Representative nominated in the will to get appointed. While I always recommend hiring an attorney to help you, you could do this by yourself. Once appointed, it usually costs $150-$200 to publish notice to creditors in a local newspaper, once a week for three weeks. This starts the 4 month creditor claim period. During that same period, the Personal Representative looks for any known creditors — bills, credit card statements, doctor’s and hospital bills, etc — and send them their own notice to creditors.
Simultaneously, the Personal Representative can “marshal the assets” of the estate. They can sell the house while waiting for creditor claims, provided that the proceeds are reserved in an estate bank account. My experience, however, is that selling a house usually takes slightly longer than the creditor period — but far less than two years. By the time the house is sold, the Personal Representative knows what creditor claims are legitimate, and can pay those immediately. The remaining assets are then distributed to the beneficiaries, and the whole thing is over in less than a year.
If you want to make the path as smooth as possible for your loved ones after you pass, please consult with a knowledgeable estate planning attorney. Let’s set up a free consultation to talk about your goals and choose the right estate planning path for you and your family.
