Is Transfer on Death a Simple Solution?
Keeping it simple is an excellent objective. But remember, things are not always as they appear. Sometimes, what seems to be a simple solution, actually creates problems.
Sometimes clients who choose to plan their estate using a Last Will and Testament as their primary document want to avoid probate, even though their Will does nothing for anyone until it is admitted to probate court. Some people think they can avoid formal estate planning and probate court. These clients and others use payable on death designations (“POD”) and transfer on death processes (“TOD”) to directly transfer property to the beneficiaries designated. The POD and TOD beneficiaries have ownership immediately at the owner’s death. As simple as that sounds, using POD or TOD may add more problems than it solves.
POD is generally used for accounts and is a private arrangement with the bank or other financial institution holding the account. POD makes the account immediately available to the beneficiaries at the account owner’s death.
TOD is generally available for titled vehicles and real estate. The Bureau of Motor Vehicles has a form to complete and a process for titling vehicles with a TOD designation. When the vehicle owner dies, the TOD beneficiary completes the process and receives a new title.
The real estate owner can record a TOD affidavit designating the beneficiaries who will acquire the real estate after the owner dies. The TOD beneficiaries complete the process by registering proof of the owner’s death at the real estate owner’s death. See for authority R.C. Sections 5302.22 and 5302.23.
With either POD or TOD, property ownership passes to the designated beneficiaries immediately upon the owner’s death by operation of law. Even if the POD or TOD beneficiaries have not completed the process, that is true. When the owner dies, the ownership of the property is considered to have vested in the beneficiaries.
The funds paid to a POD beneficiary are subject to any claims of creditors or others seeking to separate the beneficiary from the beneficiary’s money. The funds are also subject to the beneficiary’s spending whims. However, the nature of POD means it governs cash or cash equivalency rather than tangible property. As a result, the funds are not subject to calamity or other similar losses.
However, what happens if the motor vehicle or real estate is damaged or destroyed or another person is injured involving the motor vehicle or real estate.
Will the TOD Property be Insured Against Loss or Claims? Likely Not.
Unlike POD, the property subject of TOD is tangible: titled vehicles and real estate. What happens if the car is damaged or involved in a accident after the owner’s death? What happens if the house is damaged or someone is injured while at the house? Are the beneficiaries of the TOD covered?
What if the beneficiary of a TOD of real estate is married? Does the beneficiary’s spouse have a claim to the real estate?
A couple of recent cases have helped us understand the risk of using TOD. A case decided in 2019 in Hamilton County, Ohio provides some guidance.
In Walker v Albers Ins. Agency, 2019 – Ohio – 1316, the insurance company denied coverage when a fire severely damaged a home. The owner of the home died. The home was the only asset of the owner’s probate estate. Under the insurance policy for the home, the insurance company agreed to insure the home, even after the owner died, but only if the estate was open and the premiums for the policy were paid. The owner had paid the insurance premiums until March. As a result, the insurance company was required to ensure the home while the home was in the probate court process until March.
The estate was closed, and the home was transferred directly to the beneficiaries. The fire caused damage to the house after the probate estate was closed but before March. Unfortunately, the beneficiaries did not obtain new insurance coverage because they were still within the time period when the deceased former owner had paid premiums. The Court found the insurance company didn’t owe coverage to the beneficiaries, even though premiums had paid for coverage through March. Transferring the property to the beneficiaries terminated the probate case and with it the former owner’s insurance coverage. The beneficiaries were left to pay for the mayhem themselves.
Though the Walker case did not involve TOD, the principles of the case are instructive because TOD avoids probate. Therefore, for insurance policies that read similarly to the policy in Walker, the deceased owner’s coverage will not continue past the owner’s death. In a case that did involve TOD of a house, the United States Circuit Court of Appeals for the Eighth Circuit provides guidance in Strope v State Farm, No. 20-1147, February 5, 2021.
Construing Minnesota law, the court in Strope found that an insurance company was not required to insure a total loss of a home. Uncle Strope used TOD to transfer his home to his niece. Uncle Strope had a homeowner’s insurance policy with State Farm to insure his home. Six days after Uncle Strope died, his ex-wife, former Aunt Strope, burned the house down. Uncle Strope’s niece made a claim to State Farm for the loss of the house. State Farm denied the claim because the niece was not named as an insured under the policy and the insured, Uncle Strope, had no insurable interest in the house at the time of the fire, six days after he died.
Like Minnesota, in Ohio, the interest of the TOD beneficiary vests in the beneficiary at the time of the owner’s death. Unless the TOD beneficiary is an insured under the deceased owner’s insurance policy, the deceased owner’s insurance coverage will terminate at the owner’s death. As a result, a TOD beneficiary must obtain insurance coverage immediately at the time of the owner’s death. Otherwise, any losses for damage to the property or losses from claims made against the property owner for injury or death will be the TOD beneficiary’s responsibility.
What About the Rights of a TOD Beneficiary’s Spouse?
Aside from the insurance issues caused by the use of TOD for real estate, Ohio is one of a handful of states that retain Dower rights. Under R.C. Section 2103.02, a spouse has a statutory and immediate right of dower in the real estate interests of their spouse acquired during the marriage. The dower right is a life estate in 1/3 of any real estate their spouse acquires during the marriage.
As a consequence of the Dower right provided in Ohio, the spouse of a TOD beneficiary immediately acquires a life estate in 1/3 of any real estate transferred to the beneficiary under the TOD. The real estate cannot be sold, mortgaged, or otherwise conveyed without the spouse’s release of the Dower claim. When you use TOD to transfer real estate to the beneficiary, you effectively grant interest to the beneficiary’s spouse. With one beneficiary, that may work out well. With multiple married beneficiaries, before the real estate transferred by TOD can be sold, leased, mortgaged, or otherwise conveyed or encumbered, all of the beneficiaries and each of their spouses must agree.
There is a better way to assure the beneficiary you want to benefit from your property receives your property free of dower interests, uninsurable interests, and claims of others.