Current Trends - When Good Deeds Go Bad: Transfer on Death Deed Version - Episode 203

Hey there, Legal Tea Listeners – This is your host, Jenny Rozelle. Welcome back for another episode, which is a “current trends” topic where we talk about things going on currently that are relevant and pertinent to my estate and elder law world, and/or maybe things I’ve seen on the news or stumbled across on social media. Well today’s episode is inspired by a recent Wall Street Journal article written by Ashlea Ebeling, which is of course linked in the source links for this episode, and it essentially dives into an interesting and increasingly important topic that is affecting millions of American families right now which is - how to pass down what is often their most valuable asset, their home, without creating a legal nightmare for their loved ones. In the estate law world, it is SO EASY to create a legal nightmare especially when it comes to property like a house. So, let’s dive in…

Here's the scoop: according to Wall Street Journal, Baby boomers are sitting on an absolutely staggering $17 trillion in home equity, and three-quarters of them want to leave their homes to their kids or other family members. But here's where it gets a bit tricky - the traditional route of just "leaving the house to kids" in your Last Will and Testament can sometimes create major headaches. When someone dies, that Last Will and Testament may have to go through probate court, which can tie up the property for months or even years while lawyers sort everything out – the “severity” of probate is really state-dependent. Some states’ probate is not the worst thing ever, but even in those, it is usually at least still pretty annoying.

So, some states, but hear me loud and clear … NOT ALL states, have gotten creative and introduced something called a "transfer on death" deed, or TOD deed for short. Think of it like naming a beneficiary on your 401(k) - when you die, boom, the house has a “beneficiary” and it goes to whoever you named, no probate required. Which that sounds like a dream solution, right? Just fill out a form, get it notarized, get it taken care of (like, recorded) at the courthouse, and you're done. New York and New Hampshire just jumped on this bandwagon last year, showing how popular these have become. (Since this podcast is based out of Indiana, I like to give my state shout-outs … yes, Indiana has and allows transfer on death deeds.)

But here's where the Wall Street Journal article gets really interesting - these deeds, which I have seen in practice and we’ll get to that, are turning out to be, what the article calls, "blunt instruments" that can backfire spectacularly when life gets complicated. The stories are almost unbelievable to most – but not to me. One story is about a Minnesota guy who named his niece as the beneficiary, but then his ex-wife literally burned down the house a few days after he died. The niece ended up owning just the empty lot because the courts ruled that since the deed made her the sole owner, but the insurance was in his name, she couldn't collect on the policy to rebuild. I am NOT KIDDING.

Then there's another story … which gets really messy. The article tells the story of Skyler Woodard, a 32-year-old welder who's been fighting for his family's 200-acre farm since 2018. His dad left him the farm through a transfer on death deed, but it turned out the property was still being bought on a rent-to-own contract from his grandparents. When his dad died, the grandparents said the deed violated their original contract and took the farm back. The courts sided with them, even though his father had been making payments for … are you ready for it … 23 years. Now Woodard is stuck trying to sue his own grandmother to get something back. Again, I am NOT KIDDING.

These two stories show that … how these deeds can solve one problem (like avoiding probate) while creating others you never thought of. Sure, your beneficiary gets the house quickly, but what about all the other stuff that comes with property ownership? There's yet another story in the article … this one is about an 80-year-old man who left his girlfriend his $700,000 house through a transfer on death deed. She got the house no problem, but then got slammed with a surprise $25,000 tax bill for Illinois estate taxes. If he had just left her the house in his regular will instead, she probably could have avoided that entire tax hit because the estate would have likely addressed the tax bill BEFORE the house went to her. Wild, right?

The article really drives home that these deeds are like buying clothes off the rack versus getting something custom tailored. They work great for simple situations, but when your life has complications - and whose doesn't? - they can create more problems than they solve. The article states that estate planning lawyers seem to use them strategically, often alongside trusts and other tools, but they seeing too many people try to use them as a complete do-it-yourself solution. I would agree with that. It never fails … I give a lot of presentations throughout the year (to professionals, to prospective clients, to existing clients, etc.) and at nearly ever one, someone eventually asks about them.

States are scrambling to fix some of these issues as they come up. Minnesota, for example, updated their law after that whole house-burning incident to make sure beneficiaries get insurance coverage for at least 30 days after the owner dies. My state of Indiana recently updated our law for the very same thing – and I wonder if it’s because of that incident in Minnesota. I just knew about the law change, not the “why” behind it – so maybe the Minnesota case helped other states shine a light on a bit of a “hole” in the law. Nonetheless, it is clear that as more and more Americans try to figure out how to pass down their house or property, they are still working out the kinks in what seemed like a simple solution to a complex problem.

The bigger picture or maybe the main takeaway here is really about the massive wealth transfer that's happening as baby boomers age. With so much money tied up in real estate, which a lot of real estate appreciates over the decades, families are having to make tough choices about whether to sell now and pay capital gains taxes, or hold onto properties to pass them down in a tax friendly manner. These transfer on death deeds were supposed to make that process smoother, but as with most things involving money, death, and family, it is turning out to be more complicated than anyone expected.

This story reminded me of a story … where having multiple beneficiaries on a transfer on death deed even backfired. I was actually involved in this case, but it pairs nicely with this Wall Street Journal article. So, here’s the story: Take John Smith (of course not the real name) - he thought he was being smart and fair by setting up transfer on death deeds for both his house and his rental property, naming both of his kids as beneficiaries. In his mind, he was probably picturing his children working together, maybe one living in the family home while they both collected rental income from the other property. It seemed like a clean, simple solution that would avoid all that messy probate stuff we talked about earlier.

But then John died, and reality hit hard. One kid immediately wanted to cash out and sell both properties - maybe they wanted or needed the money or just didn't want the hassle of being a landlord. The other kid had completely different ideas and wanted to hold onto the houses, probably seeing them as long-term investments or having sentimental attachment to the family home. I think it was more of the latter. Now, because of these transfer on death deeds, you have two people who each own 50% of two properties, and they're pulling in completely opposite directions.

Here's where it gets really ugly. The kid who wanted to keep the properties was not exactly volunteering to cover all the expenses that come with homeownership - property taxes, insurance, maintenance, repairs on the rental unit, dealing with tenants. Why should they pay for everything when their sibling owns half? But the sibling who wanted to sell was not about to start writing checks for properties they were desperately trying to get rid of. So there are these two houses sitting there, bills piling up, and two siblings who are barely speaking to each other.

Well, when family members cannot agree on what to do with jointly-owned property, the courts have an option called a partition sale. It is basically the legal system throwing up its hands and saying, "Fine, if you can't figure this out like adults, we will sell everything and split the money." That is exactly what happened here - a judge ordered both properties to be sold, and whatever was left after legal fees and expenses got divided between the two kids.

The really heartbreaking part of this whole story is what John probably never saw coming. These weren't two kids who had been at each other's throats their whole lives. This was a situation where someone genuinely thought their children would work together, and instead, a well-intentioned estate planning decision ended up permanently damaging their relationship. There's nothing quite like a court-ordered property sale to poison family dynamics for years, maybe decades, to come. And honestly … it is one of those perfect examples of how transfer on death deeds can technically work exactly as designed - both kids got the property immediately when their father died, no probate required – so the deeds did their job, but they could not force his children to agree on what to do next, and they certainly couldn't preserve the family harmony he probably assumed would naturally happen.

So hear me loud and clear, my friends, transfer on death deeds are not the only option on the table and honestly, they are NOT the best option on the table for most folks. So, consider these real-life stories your warning … and tread carefully!

Alrighty, let’s wrap this episode up, shall we? Next week, we’re back to the “celebrity estate planning” type of episode – so, for this episode, I’m going to go dive into the incredibly famous author, Charles Dickens’ estate. While he died a long, long, LONG time ago, there are still some valuable lessons that his estate can give to us … even today. So yeah, next week is on him, Charles Dickens, so tune in for that next week, Legal Tea Listeners. Talk to you then!

Sources:

https://www.wsj.com/personal-finance/house-inheritance-transfer-on-death-deed-aa10fc82