NOTE: State laws change frequently and the following information may not reflect recent changes. For current tax or legal advice, please consult with an accountant or an attorney since the information contained in this article is not tax or legal advice and is not a substitute for tax or legal advice.
In a growing number of states, a new type of legal document has been introduced that allows real estate owners to name who they want to inherit their property after they die. If properly signed and recorded, then this new type of document, called a transfer on death (or TOD) deed or affidavit or beneficiary deed or affidavit, will allow the real estate described in the deed or affidavit to pass to the named beneficiaries outside of probate.
As of January 1, 2013, the states which recognize transfer on death deeds or beneficiary deeds are as follows:
- District of Columbia
- New Mexico
- North Dakota
Aside from states that recognize transfer on death deeds or affidavits or beneficiary deeds by state statutes enacted by the state legislature, at least three states - Florida, Michigan and Texas - recognize an "enhanced life estate deed," also referred to as a "Lady Bird Deed," under state common law. In these states, an enhanced life estate deed functions in a manner similar to a transfer on death deed.
How a TOD Deed, Affidavit or Enhanced Life Estate Deed Works to Avoid Probate
How a TOD deed or affidavit or an enhanced life estate deed can be used to avoid probate is fairly straightforward:
- First, the current owner will sign a new deed or an affidavit that states who should inherit the real estate after the current owner's death. Note that in some states an attorney is required to prepare the new deed. In Florida, it is highly recommended that an attorney prepare an "enhanced" life estate deed in order to avoid inadvertently preparing a "regular" life estate deed.
- Next, the new deed or affidavit will be recorded among the appropriate public land records. This is usually in the county where the real estate is located and should not incur real estate transfer taxes since there will be no immediate transfer of ownership. Recording fees vary from state to state and can range anywhere from $10.00 to upwards of $100.00.
- Finally, after the owner dies, a death certificate will need to be recorded among the same public land records where the real estate is located in order to put the world on notice that title to the real estate has been transferred into the names of the beneficiaries listed in the TOD deed or affidavit or enhanced life estate deed due to the owner's death.
What Happens if the Owner Later Wants to Name Different Beneficiaries?
What happens if the current owner of the real estate later changes his or her mind and wants the real estate to go to different beneficiaries? Then the current owner can sign and record a new TOD deed or affidavit or a new enhanced life estate deed.
Should You Consider a TOD Deed or Affidavit or Enhanced Life Estate Deed?
The ultimate goal of a TOD deed or affidavit or an enhanced life estate deed is to avoid the costly probate process. However, the laws governing these type of deeds or affidavits vary from state to state, and in the end a TOD deed or affidavit or enhanced life estate deed may not be right in certain situations.
If you own real estate in one of the states that currently recognizes TOD or beneficiary deeds or affidavits or enhanced life estate deeds, then consult with an estate planning attorney in the applicable state to determine if one is right for you.