ALLEN HAUGRUD

New "Transfer on Death" Deed

A new Minnesota law allows a person to transfer property upon death by creating a Transfer on Death Deed ("TODD"). A TODD is comparable to the use of pay-on-death or transfer-on-death accounts at banks or with brokerage houses in that a TODD allows the owner of real property to designate a beneficiary of the property, and, upon the death of the owner, the property passes to the beneficiary as non-probate property, without the disadvantages of using a joint tenancy or life estate deed.

How to Use a TODD

A TODD must be recorded during the lifetime of the owner to be valid, but the transfer of the real estate becomes effective only after the death of the owner.

After the owner's death, the beneficiary named in the TODD must record a death certificate and affidavit of survivorship and clearance certificate (from medical assistance claims and liens) to have the property put into the beneficiary's name.

The new law specifically provides that a designated beneficiary has no rights to the owner's property during the owner's lifetime. Beneficiaries cannot transfer, mortgage or pledge any interest in the property as long as the owner is alive.

Unlike other types of deeds, if the owner changes his or her mind about who should get the real estate, the owner can revoke the TODD or simply record a new one naming a different beneficiary. Like the TODD, a revocation must be recorded prior to the owner's death.

An owner can name more than one person as a beneficiary. An owner can name a contingent beneficiary or class of beneficiaries who get the property if the original beneficiary dies.

A TODD is exempt from state deed tax per Minn. Stat. § 287.22(15).

 

What the New Law Does Not Do

A TODD transfers property upon death, but there are several things that it does not do:

A TODD does not avoid estate taxes.

It does not protect the property from creditors. Mortgages or other liens that become attached to the property during the owner's lifetime carry over to the beneficiaries.

 

A TODD may be helpful for persons who do not have a trust and have elected not to currently transfer ownership of their homestead because of the potential need to apply for Medical Assistance in the future.

Other Factors to be considered:

1. Real Estate Taxes. A TODD does not affect homestead taxes.

2. Gift Taxes. A TODD does not require a gift tax return because it is not effective until the owner's death.

3. Estate Taxes. The entire value of the homestead conveyed in a TODD will be included in the current owner's estate on death. This will not cause any Minnesota estate tax consequences, unless the taxable estate exceeds the current estate tax minimum of one million dollars.

4. Income Taxes. Real estate transferred with a TODD will be included in the previous owner's estate at death and will receive a full stepped-up tax basis. The beneficiaries report no capital gains on the sale of the property if it is sold for the fair market value as of the date of death.

5. Revocation. 1) A TODD may be revoked at any time by the owner(s), 2) A TODD may be revoked by a revocation document or by a second TODD which is acknowledged on a later date, 3) A revocation must be recorded prior to death of the owner(s), 4) If owned by joint tenants and the revocation is not executed by all owners, the revocation is not effective unless executed by the last surviving owner, 5) A non-TODD conveyance to a third party after a TODD is recorded revokes the TODD as to the interest conveyed.

6. Mortgages. A TODD allows the current owner to mortgage the homestead without the signature or consent of the grantees. The grantees take the property at the death of the grantor subject to all mortgages or other encumbrances of the real estate.

7. Medical Assistance. A TODD has no effect on an individual's ability to apply for Medical Assistance because it is not effective until death. A TODD will not prevent the owner from selling the property during the owner's lifetime if a sale is needed to meet Medical Assistance eligibility requirements or for any other purpose. A TODD will not protect property from Medical Assistance claims or liens. The grantees of the property will take the property subject to Medical Assistance claims or liens.

8. Control. Transfer of the real estate directly to multiple grantees fails to provide control to a specified individual, such as a Personal Representative or Trustee, to pay expenses, maintain property, prepare and conduct a sale, etc. if mom and dad use a TODD to leave the lake cabin to their bickering children. Though probate may be avoided, the parents have perhaps made things worse. A trust is more likely a better tool for such a situation.

9. Capacity. The risk of incapacity should not be overlooked. Minimally, clients who execute a TODD should also execute powers of attorney. Even so, trusts remain superior tools to manage the property of incapacitated individuals.

When to Use a TODD

A TODD can be very beneficial for small estates, including situations where there is one owner and one beneficiary, unmarried committed partners or individuals who do not need the tax benefits of a trust.

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