The Hidden Dangers of Transfer-on-Death Deeds
Transfer-on-death deeds, also known as “TOD Deeds”, can sound like the perfect estate-planning solution.
“Just put your child on the deed, and the house passes to them when you die.”
It sounds simple. It can avoid probate. And compared with a more comprehensive estate plan, it may appear inexpensive and easy.
But simplicity can be deceptive.
Indiana law permits transfer-on-death deeds, and they can be useful in the right circumstances. The problem is that homeowners sometimes use a transfer-on-death deed as a substitute for an overall estate plan. When that happens, the deed can create unexpected problems involving beneficiaries, minor children, disabled beneficiaries, Medicaid, creditors, family relationships, and the administration of the estate.
Here are some important reasons an Indiana homeowner should think carefully before relying on a transfer-on-death deed.
1. A Transfer-on-Death Deed Only Solves One Piece of the Estate Plan
A transfer-on-death deed is designed to determine who receives a particular piece of real estate when the owner dies.
Under Indiana Code § 32-17-14-11, a properly executed and recorded transfer-on-death deed can transfer the owner's interest in real estate to a designated beneficiary at death.
But an estate is usually much more complicated than one house.
What happens to the bank accounts?
Who pays the final bills?
Who handles taxes?
Who handles personal property?
What happens if one beneficiary dies before the homeowner?
What if the homeowner later changes the will?
What if one child receives the house while the other children are supposed to receive an equal share of the estate?
A transfer-on-death deed does not answer all of those questions. It is one beneficiary designation concerning one asset.
That can become a problem when homeowners create the deed without coordinating it with their wills, trusts, retirement accounts, life insurance, and other beneficiary designations.
2. The Deed Can Create an Estate Plan That Does Not Match the Homeowner's Wishes
One of the biggest dangers of beneficiary-designation planning is inconsistency.
Imagine a parent has three children. The parent's will divides the estate equally among all three children. But the parent later signs a transfer-on-death deed naming only one child as the beneficiary of the home.
The homeowner may assume the will controls everything.
That is not how it works.
The transfer-on-death deed is intended to control the transfer of the real estate at death. Indiana law specifically provides for the transfer of the property upon the owner's death under the statutory transfer-on-death framework.
This can produce a result very different from what the homeowner—or the other children—expected.
This is why beneficiary designations should be coordinated with the rest of an estate plan rather than treated as an isolated transaction.
3. What Happens If the Beneficiary Dies First?
This is one of the most overlooked issues with a transfer-on-death deed.
Suppose you name your daughter as the beneficiary of your Indiana home.
Several years later, your daughter dies before you.
What happens when you eventually die?
Indiana's transfer-on-death statutes contain default rules governing what happens when a designated beneficiary does not survive the owner. Under the statute, certain descendants of a deceased beneficiary can take the beneficiary's interest per stirpes, unless the transfer-on-death instrument provides otherwise.
That creates an important planning issue.
You may think you are leaving the house to your daughter.
But if she dies first, the property may ultimately pass to her descendants.
That may be exactly what you want.
Or it may not.
And what happens if those descendants are minors?
4. A Minor Beneficiary Can Create a New Set of Problems
Suppose your daughter dies before you and leaves two children—a 10-year-old and a 7-year-old.
If those grandchildren become entitled to an interest in your home, they obviously cannot manage the property the way an adult owner could.
Someone may need to act on their behalf, and court involvement may be required depending on the circumstances.
Now consider the practical questions:
Who manages the house?
Who pays the property taxes and insurance?
Who pays for repairs?
Can the property be sold?
Who decides whether it should be rented?
What happens to the minor's share of the proceeds if the property is sold?
When does the child receive control of the inherited property?
A transfer-on-death deed answers the question of who receives the property.
It does not provide a sophisticated plan for how that property should be managed for a minor beneficiary.
That distinction is extremely important.
A properly drafted trust, for example, can be structured to hold property for a minor beneficiary and establish who manages the assets, how they may be used for the child, and when the child receives control.
5. What If the Beneficiary Has a Disability?
The situation can be even more complicated when the beneficiary has a disability.
Consider a parent who owns a home and names an adult child with a disability as the transfer-on-death beneficiary.
The parent's intention may be completely understandable:
“I want my child to have my house when I'm gone.”
But an outright inheritance may not always be the best way to accomplish that goal.
Depending on the beneficiary's circumstances, receiving valuable property outright can affect eligibility for certain means-tested government benefits or create financial-management issues.
The important question may therefore not be:
“Who should inherit my house?”
Instead, the question may be:
“How can I provide for my child without jeopardizing the child's financial security, benefits, or independence?”
That requires a much more sophisticated analysis than simply putting the child's name on a transfer-on-death deed.
6. A Special Needs Trust May Be More Appropriate for Some Disabled Beneficiaries
For a beneficiary with a disability who receives or may need means-tested public benefits, an outright inheritance can create significant planning concerns.
Depending on the circumstances, a properly drafted special-needs or supplemental-needs trust may provide a better structure.
Rather than making the beneficiary the outright owner of the property, the trust can allow assets to be managed for the beneficiary under specific rules.
The exact type of trust and its effect on government benefits depends on the beneficiary's circumstances. This is an area where individualized estate-planning and benefits advice is especially important.
The important point is that a transfer-on-death deed generally answers a narrow question:
Who receives my interest in the property when I die?
It does not, by itself, provide the ongoing management structure that may be necessary for a beneficiary who is a minor, incapacitated, or receiving means-tested benefits.
7. A Transfer-on-Death Deed Does Not Protect the Property From Creditors or Medicaid Estate Recovery
A Transfer-on-death deed does not protect the property from the owner’s creditors.
Another common misconception is that a transfer-on-death deed automatically places the home beyond the reach of Medicaid estate recovery.
That is not a safe assumption.
The Indiana Family and Social Services Administration's Medicaid Estate Recovery Program explains that Indiana's estate-recovery process can include certain non-probate assets. FSSA specifically states that its definition of an estate includes certain property conveyed through a non-probate transfer.
FSSA also explains that a Medicaid recipient's house and other real estate can be subject to estate recovery.
This is an important distinction:
Avoiding probate is not the same thing as avoiding Medicaid estate recovery.
Anyone considering a transfer-on-death deed as part of a long-term-care or Medicaid strategy should have the entire plan reviewed by an attorney who understands Indiana Medicaid planning.
8. A Transfer-on-Death Deed Does Not Eliminate Every Post-Death Requirement
Transfer-on-death deeds can help avoid probate administration of the property itself, but that does not mean nothing needs to be done after the homeowner dies.
Indiana law contains specific procedures concerning the documentation of the beneficiary's interest after death.
And the deceased person's other assets, debts, taxes, and administrative responsibilities may still require attention.
In other words:
“Outside probate” does not mean “nothing needs to be done.”
9. Multiple Beneficiaries Can Create a “Tangled Web” of Ownership
Naming several children as beneficiaries may seem like an easy way to divide the house.
But a house is not like a bank account.
Imagine that a parent leaves a house equally to three children through a transfer-on-death deed. Each child now owns a one-third interest in the property.
At first, that may seem manageable.
But what happens when one of those three children dies?
The deceased child's interest may pass to that child's descendants or other beneficiaries, depending on the terms of the transfer-on-death deed and Indiana's applicable succession rules.
Now the house may be owned by the two surviving children plus the deceased child's children.
If one of those grandchildren later dies, that grandchild's interest may pass to another generation.
Over time, what started as a simple transfer to three children can turn into a property owned by a growing number of people.
For example:
Parent dies → 3 children inherit
Then:
1 child dies → 2 children + grandchildren inherit
Then:
1 grandchild dies → surviving children + additional descendants inherit
Eventually, a single house could have numerous owners, each holding an interest in the property.
That can create an enormous practical problem.
Who gets to decide whether the house is sold?
Who pays the property taxes?
Who pays for the roof when it needs to be replaced?
Who pays the insurance?
What happens if one owner wants to sell but the others do not?
What if one owner wants to live in the house?
What if another owner wants to rent it?
What if an owner cannot afford their share of the expenses?
What if the owners live in different states?
What if one of the owners is a minor?
What if one owner is disabled or unable to manage their financial affairs?
The more people who own the property, the more difficult it can become to reach agreement.
And the problem can compound with each generation.
A House Can Become a Family Tree of Co-Owners
This is one of the risks that is easy to overlook when someone says, “We'll just put all of the children on a transfer-on-death deed.”
The homeowner is thinking about the first generation.
But estate planning should also consider what happens after the first generation.
A house that passes to three children may eventually be divided among grandchildren, great-grandchildren, and other descendants. Instead of having one or two people responsible for the property, there may eventually be a large group of co-owners with different financial circumstances, different goals, and different ideas about what should happen to the property.
At that point, the family may need legal proceedings or a negotiated sale simply to untangle ownership of a property that was originally intended to be a simple inheritance.
This is why the question should not merely be:
“Who gets my house when I die?”
It should also be:
“What happens to my house after the people I name as beneficiaries are gone?”
A well-designed estate plan can address that question in advance. Depending on the circumstances, a trust or other planning structure may provide substantially more control over how the property is managed and distributed than simply allowing ownership interests to pass from one generation to the next.
A transfer-on-death deed can be an effective tool for avoiding probate of real estate, but avoiding probate does not mean avoiding future ownership problems.
Sometimes the biggest problem begins after the property successfully passes to the beneficiaries.
10. The Deed Has Technical Requirements
A transfer-on-death deed is a legal document affecting real estate. It is not simply a form that says, “My house goes to my daughter when I die.”
Indiana law establishes requirements for creating and recording these deeds.
For example, Indiana Code § 32-17-14-11 addresses execution and recording requirements and also addresses situations involving different forms of property ownership.
This matters because a homeowner can unintentionally create problems by using a generic deed without first examining how the property is currently titled.
The existing deed, marital status, co-ownership, beneficiary designations, and overall estate plan all matter.
11. The Biggest Problem May Be False Confidence
Perhaps the greatest danger of a transfer-on-death deed is not the deed itself.
It is the belief that the deed means the homeowner has completed their estate planning.
A homeowner might have:
A transfer-on-death deed for the house
An outdated will
Old beneficiary designations on retirement accounts
Jointly owned bank accounts
No incapacity plan
No plan for a minor or disabled beneficiary
No plan for Medicaid or long-term care
Technically, there may be documents in place. Practically, however, there may be no coordinated estate plan.
Good estate planning is about making the pieces work together.
The Bottom Line
A transfer-on-death deed can be convenient, but convenience is not the same thing as comprehensive estate planning.
Before signing one, an Indiana homeowner should consider how the deed fits with their:
Will
Trusts
Retirement accounts
Life insurance
Other beneficiary designations
Property ownership
Family circumstances
Creditor concerns
Medicaid and long-term-care planning
Plans for minor or disabled beneficiaries
The goal should not simply be to avoid probate.
The goal should be to create an estate plan that transfers property to the right people, in the right way, at the right time—and minimizes unnecessary conflict and complications for the people left behind.
A transfer-on-death deed may accomplish the first part.
A comprehensive estate plan is designed to address everything that comes after it.
This article is for general educational purposes only and is not legal advice. Indiana estate-planning, probate, Medicaid, guardianship, and trust laws can be complicated and may change. Anyone considering a transfer-on-death deed should consult an Indiana estate-planning attorney about their particular circumstances.
Sources and Further Reading
Indiana Code — Title 32, Article 17, Chapter 14: Transfer on Death Property
Indiana Family and Social Services Administration — Medicaid Estate Recovery
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