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Short answer: It depends.
Transfer on Death Designation Affidavits are often times referred to as Transfer on Death Designations, and abbreviated as TODDA, TODD, or TOD, for the purposes of this article we will refer to them as TODs.
TODs are a relatively easy way to pass real property after one’s death. In its most simple terms, a TOD is an affidavit where the owner designates beneficiary(ies) to receive property upon the death of the owner. Upon death of the owner, the TOD is triggered and the ownership interest in the property is transferred to the beneficiaries.
The benefits of a TOD are clear; it’s a quick, inexpensive way to pass property and avoid the probate process. The ease and apparent straightforwardness of using a TOD as an estate planning device has likely led to their overuse. While the benefits are clear, the potential drawbacks are more subtle, especially when used to convey real property or real property interests.
This article will discuss two drawbacks of using a TOD to transfer real property, insurance coverage lapse and Ohio’s dower rights. Both need to be considered before using a TOD. Every situation is different, when in determining whether a TOD is appropriate for you to use it is important to consult an estate planning attorney for professional advice.
INSURANCE LAPSE
A recent Ohio Court of Appeals decision put estate planning practitioners on notice of a significant drawback of TODs – the potential for a lapse in insurance coverage.
The case, Walker v. Albers Insurance Agency, had nothing to do with TODs, however the ruling and the lesson certainly applies. The story in Walker is a tragic one for the Walkers. Ms. Walker inherited a partial interest in her childhood home. She then lived there alone for some years and was the only named person on the homeowner’s insurance policy.
She passed away without a will. The estate was opened by probate court and her sister was appointed executor. Ms. Walker’s interest in the house was transferred to the her heirs, the other remaining property was distributed, and subsequently the estate was closed. Two weeks later, before anyone had taken physical possession of the house, a fire burned the house down.
The deceased homeowner’s insurance policy had not yet expired, but coverage was denied because neither the descendants nor the heirs qualified as an “insured” under the policy when the loss occurred. The appeals court agreed with the insurance company affirming the trial court’s determination that coverage was rightfully declined.
Who is an “insured” person under the insurance policy? All policies differ, though most use similar language, but in the Walker’s case an insured person was:
In Walker, there was no dispute that the sister was a legal representative at one point in time. However, once the probate estate was closed – two weeks prior to the fire – she ceased to be a legal representative. Thus, at the time of the loss there was no person insured under the policy.
This illustration is exacerbated when applying it to a TOD. Because under a TOD, the transfer happens immediately at the time of death, it leaves little time for the beneficiary to seek insurance coverage. Further, depending on the relationship with the deceased, lapsed insurance coverage may not be a top priority days or weeks after the death.
Additional protective measures should be taken, whether it is reconsidering your estate planning method, putting the property into a trust, or adding the beneficiary to the existing insurance policy during the life of the donee. Using a TOD to transfer real property and failing to protect the property is playing with fire, potentially literally.
DOWER RIGHTS
Another issue with TODs is the potential to cause a logistical nightmare. Ohio still recognizes dower rights which are statutory rights and interests in marital property held by the non-owning spouse. If Spouse A is the only title owner of real property, Spouse B still has to sign off on any sale of the property to waive their dower rights. (More on dower rights can be read here)
Because Ohio recognizes dower rights, each beneficiary’s spouse also has a legal interest in the property. In order to transfer the property, each spouse needs to sign the deed and waive their interest in the property. The potential logistical nightmare is best illustrated by example:
T leaves, by TOD affidavit, real property to children A, B, C, D. T then dies. At time of T’s death, child B has predeceased T. B had three children X, Y, Z. Assume everyone has a spouse. Depending on the drafting of the TOD document X, Y, and Z may or may not receive B’s interest in the real property. Let’s assume B’s interest pass to X, Y, and Z.
At this point there are 6 individuals that are beneficiaries of T’s real property. If the property is to be sold, all 6 beneficiaries and their spouses will have to sign the purchase agreement and power of sale. At closing, dower would require all 6 descendants of T and their spouses to be present to sign the power of sale. That’s 12 people! The logistics behind this potential situation make these transactions less than desirable.
A much simpler solution would be a sale through a probate estate or a trust, where a sale of the real property can be made through the estate or trust and distributions can be determined accordingly. While many intend their TODs to make things simpler for their heirs, there are certain instances where one could complicate matters.
TODs can be an effective and inexpensive way to transfer property without the need for the probate process, however in addition to the above illustrations, there are numerous drawbacks to consider. These potential pitfalls demonstrate the necessity to consult an experienced estate planning attorney.
The estate planning attorneys at Spitler Huffman law firm have substantial experience in creating an estate plan to fit their clients’ needs. Located in Bowling Green and Rossford, Ohio we are dedicated to serving clients in Northwest Ohio including Wood, Henry, Hancock, and Sandusky Counties. If you live in Bowling Green, Findlay, Perrysburg, Napoleon, Port Clinton, Fremont, Rossford, or other areas in Northwest Ohio and need estate planning assistance, contact us today.