The Downside of Transfer on Death Designations
Let’s change Phil and Marge’s situation and assume that, in addition to recording a joint and survivor deed, they also recorded a Transfer on Death Affidavit naming their children as beneficiaries on their house. Now, after Phil and Marge both pass away, their children own the property together—each is 50% owner.
Great, right? Phil and Marge planned ahead, avoided probate, and their bank accounts have been split evenly between their children, who are equal owners of their home.
Marge and Phil's children get together a few days after the house is transferred to them. Amy, the older of the two talks to her younger sister, Fran, about some minimal upgrades they can make to the property to increase its value. Fran, who spent her entire childhood in the house, is uneasy with the idea of selling and talks in general terms about buying her sister out.
Unfortunately, Fran’s credit is bad after her divorce and subsequent foreclosure, so she can’t get a mortgage to buy out her sister. Amy insists on a sale. The sisters’ relationship deteriorates over the next six months and they spend their first Thanksgiving apart since Fran was born.
As you can see in this instance the problem with Transfer on Death designations is that there’s no one left to manage your assets after you die. Without centralized management of your property, beneficiaries who receive property together all must agree before any decisions can be made about the property—selling, updating, renting all must be approved by all the owners, whether there are 2 or 5.
Amy’s insistence on the sale isn’t going to get her anywhere. Fran can obstruct a sale as long as she’d like, forcing the property to sit empty.
When one beneficiary will receive real estate, a Transfer on Death Affidavit may be an efficient mechanism for passing property after death. For two beneficiaries, the arrangement can result in a statement. And for three or more beneficiaries, a Transfer on Death Affidavit nearly guarantees problems for the beneficiaries.
The other problem with not having centralized management is that there’s no one left to pay your debts.
There are fewer problems when bank and investment accounts are transferred to beneficiaries through a Transfer on Death designation, since accounts are split between the beneficiaries. But other problems can develop. For instance, if all of a person’s assets are distributed Transfer on Death, there is not a pool of assets that can be used to pay the deceased person’s debts.
Your creditors can go after the assets you passed to your beneficiaries. If a creditor can’t find one or more of your beneficiaries, the remaining beneficiary or beneficiaries will be on the hook. Your beneficiaries can, in essence, take the money and run.
If this story brings up questions about what your beneficiaries will get, when they will get it, and what they will have to do to get it, give us a call and schedule a time to sit down with one of our attorneys for an honest, no-cost assessment. We can be reached at firstname.lastname@example.org or 937-985-1843.