Use of Transfer on Death Deed to Avoid Probate
For most people, there are two types of assets which if held at death would require probate of their estate. Real estate and financial assets individually owned by a deceased person at the time of death typically trigger the need for probate of that person’s estate.
Jointly Owned Assets and Probate
The traditional way to pass jointly owned property at death without probate is to simply title the asset as joint tenants with right of survivorship. In fact, most married couples hold their home, bank and investment accounts in this format. This way, upon the death of one of them, the survivor automatically becomes the sole owner of the asset without the need for formality beyond presentation of the other’s death certificate. Thus, when married couples title their assets as joint tenants with right of survivorship, the estate does not require probate at the time of the first death. However, at the death of the survivor, probate is usually necessary in the absence of effective planning.
For many years, estate planning attorneys often chose the revocable living trust as the preferred means of avoiding probate for clients whose situations and desires made that a priority goal. In our practice, we often recommended a short-form “residential trust” for smaller estates to place the family home outside the scope of probate.
Jointly Owned Real Estate
Since 1993, Nebraska residents have been able to designate a beneficiary who would receive their financial account at the time of the owner’s death. The Uniform Transfer on Death Securities Registration Act, adopted by Nebraska in that year, applies to securities, security accounts and bank accounts. It also covers ownership interests in various kinds of business enterprises, such as limited liability companies and partnerships. However, this law does not extend to interests in real estate.
In 2013, Nebraska joined the 25 other states that authorize the use of Transfer on Death Deeds to transfer title to real estate upon death. That is, an owner of a home or other real estate may designate who will become the owner of their real estate at the time of their death. In fact, all states that adjoin Nebraska, other than Iowa, authorize/recognize Transfer on Death Deeds for property in their jurisdiction.
What is a Transfer on Death Deed?
A Transfer on Death (TOD) Deed is an instrument, or legal document, by which the owner of real property can designate one or more beneficiaries who will obtain title to the property at the owner’s death without requiring probate. Significantly, this instrument may only be used by individuals; business entities may not use TOD deeds.
The key point is that a TOD deed does not take effect until the owner’s, or transferor’s, death. Until that time, the property continues to be owned by the transferor during their lifetime, and the deed may be revoked by the transferor at any time prior to death.
How Does a Transfer of Death Deed Work?
In order to complete the transfer of real estate ownership after the death of the transferor, the beneficiary must record this transferor’s death certificate with the appropriate authority. Simply put, the beneficiary is required to file the death certificate along with a Form 521 Real Estate Transfer Statement with the Register of Deeds to complete the transaction.
Since the transfer effected by the TOD Deed is not a completed gift until death, there are no gift tax consequences. Because the gift is effective at death of the transferor, from a taxation standpoint, the beneficiary obtains a step up in basis to the date of death value of the property.
The rights and powers of the owner of the property are not affected by the creation or the recording of a TOD Deed. The owner has complete freedom, without the concurrence of the beneficiary, to sell, mortgage, or otherwise deal with the property as the sole owner, just as before the TOD Deed was recorded. The TOD Deed can be revoked or modified by the owner of the property at any time before death. Any subsequent recording of a new TOD Deed for the same property revokes any and all prior TOD Deeds.
Who Should Use a Transfer of Death Deed?
We recommend the use of TOD Deeds to clients whose principal assets consist of their home and their financial accounts, and who wish the transfer to take effect upon the time of death. For clients who wish to provide for family members who are minors or who may not be ready to receive and properly manage their inheritance, other forms of transfer may be appropriate. For example, trusts may be best suited in these cases.
Do I Need a Lawyer?
Please be aware that Nebraska has several very specific requirements for TOD Deeds, and that any forms you find online may or may not have your intended effect. In addition, although the TOD Deed may be useful in avoiding probate in many cases, there may be assets and holdings other than the family home that would require placing the estate in probate. Also, there may be other options that are more suited to accomplish you and your family’s wishes. For this reason, we strongly recommend you consult an experienced estate planning attorney for assistance with your unique estate planning needs.