Your Home, Their Future: Using TOD Deeds in Estate Planning

For many families, their principal residence is their most significant asset both sentimentally and financially. As time passes, a home often appreciates in market value while serving as the backdrop for countless memories, making it even more important to preserve. Understandably, most homeowners want to ensure that their cherished homes stay in the family in the most cost effective way as possible.

Fortunately, both federal and Wisconsin law creates options to help achieve that goal. One of the most practical tools available is the Transfer on Death Deed (TOD Deed), which allows homeowners to pass their property to loved ones outside of probate while retaining full ownership during their lifetime. 

What is a Transfer on Death Deed? Why should I use one?

A Transfer on Death Deed (TOD Deed) is a simple legal tool that allows a homeowner to name one or more beneficiaries who will automatically receive the property upon the owner’s death without going through probate. The deed is filed during the homeowner’s lifetime, but it does not transfer any present ownership interest. Instead, it creates a future interest in the property that becomes effective only when the homeowner passes. This means that homeowners who have filed a TOD Deed can still sell the property, refinance it, or revoke the TOD Deed at any time. 

Since a TOD Deed transfers the home outside of the probate system, estates and their beneficiaries avoid the time-consuming and costly legal process of probate. Another great benefit to TOD Deeds is that when the property is transferred at death, the beneficiary receives a step-up in basis. This means that the property’s tax basis is adjusted to its fair market value as of the date of the original homeowner’s death. This step-up can significantly reduce or even eliminate capital gains taxes if the home is later sold.

What are the alternatives to a TOD Deed? Are they right for me?

While TOD Deeds are efficient and cost-effective, they’re not the right fit for every situation. Depending on a homeowner’s circumstances, it may be better to transfer the property to a revocable trust, an LLC, or even an irrevocable trust. 

These alternatives often make sense when family dynamics are more complex.. For instance, if a homeowner’s only heirs are minor children, transferring the home to a trust or an LLC allows an owner chosen trustee or member to manage the property, rather than vesting ownership directly to the child. Similarly, if a homeowner wishes to leave the home to four or more beneficiaries, transferring the house through a TOD Deed would not be advisable. Splitting ownership between so many people can make it very difficult to reach consensus on decisions like maintenance or sale. Transferring the house to a trustee or LLC helps streamline future decision making for the house.

However, there’s a catch. The viability of some of these alternatives are restricted when the house is subject to a mortgage with a due-on-sale clause. Depending on the mortgage agreement’s language, a transfer of a house to an irrevocable trust or an LLC may be treated as a sale and thus trigger a due-on-sale clause in which the bank becomes entitled to immediate repayment of the entire outstanding balance. That can be a dealbreaker for many families who don’t have the resources to pay off the mortgage in one large sum. In such instances, the TOD Deed would then be the best option despite complicated family situations.

I am interested in avoiding probate to transfer my house. What should I do next?

If you are a homeowner who wants to ensure your loved ones can take ownership of your home smoothly after your passing, we’re here to help.  At Moertl, Wilkins & Campbell, S.C., we take great care to craft estate plans that are thoughtfully tailored to each family’s unique needs. Whether that means using a TOD Deed, a trust, or another planning tool, we’ll walk you through your options and help you choose the path that makes the most sense for you and your goals.