How to Choose Between Transfer on Death Deed or Living Trust

Creating a formal, written plan for how your assets will be distributed upon your death is one of the most selfless and responsible things you can do for your loved ones. This is a key component of estate planning. It helps to minimize any confusion and ensures your wealth is allocated according to your wishes.

You have a few options available to you, but two of the most common are transfer on death deeds and living trusts. Each has its own benefits and drawbacks. Your decision should also depend on your personal goals, the complexities of your estate, and the amount of control you wish to have throughout your life.

It’s important to understand how each of these options work before making your choice. Our experienced CERTIFIED FINANCIAL PLANNER™ professionals at Chatterton & Associates are here to discuss these two options so you can make an informed decision for your estate.

What is a Transfer on Death Deed? 

A transfer on death (TOD) deed, also known as a beneficiary deed, is a legal document that allows an individual to name a beneficiary of their real-estate assets upon their death. 

These documents help you avoid probate, which often involves a lengthy and complex court process.

If you want your home (or another property) to go to a particular person or persons, a TOD deed will ensure ownership is transferred directly to them after your passing. TOD deeds are designated for real-estate properties only. Therefore, establishing a transfer of other assets, such as stocks, bonds, or savings accounts will require a different procedure. 

It’s also important to note that TOD deeds are only available in certain states and the document must be created in the state where the property is located.

What is a Living Trust?

A living trust is a legal document that allows an individual to place their assets into a trust for their own benefit during their lifetime, and then transfer ownership of these assets to their chosen beneficiaries upon their death. Just like a TOD deed, assets held in living trusts bypass probate, allowing them to be distributed more quickly and privately.

The primary way they differ from TOD deeds is that living trusts can hold all types of assets, not just real estate. Your living trust may include real estate, but it can also include stocks, bank accounts, valuable belongings, and any other assets you want to transfer to someone upon your passing. 

Another key difference is that a living trust can be made revocable or irrevocable:

1. A revocable living trust can be changed at any time.
2. An irrevocable living trust cannot be changed once it has been created.

Why Not Just Have a Will?

Do you really need to choose between a TOD deed or a living trust? Can’t you just use a will?

While you can use a will to transfer your assets and belongings, doing so means that your property will have to go through probate after your passing. Probate can be a long, expensive, and arduous process. It takes approximately 12-18 months, so avoiding this can make the process much simpler and less grievous for your loved ones.

Can You Have Both a TOD Deed and Living Trust?

Yes, you can have a TOD deed and a living trust at the same time. However, it’s important to make sure you understand the implications of using both and how they may interact with one another.

In general, the most recent legal document takes precedence. But there are some exceptions to this. For example, if you have an existing revocable living trust and then create a TOD deed for the transfer of the same property, the TOD deed will override the living trust for that particular asset. However, if you have an irrevocable living trust, it cannot be overridden by a TOD deed.

Every situation is different, so it’s often helpful to consult with a CERTIFIED FINANCIAL PLANNER™ professional or an attorney for individualized guidance and support.

Pros and Cons of a TOD Deed

Pros

• Affordability: TOD deeds are generally less expensive than living trusts.
• Simplicity: TOD deeds are less complex than living trusts, allowing for an easier and faster legal process.
• Adaptability: Due to their simplicity, TOD deeds can be easily edited or revoked in the future.

Cons

• Asset limitations: TOD deeds are only applicable to real estate and cannot include other assets such as stocks, savings accounts, or personal possessions. 
• State restrictions: TOD deeds aren’t available in every state. Additionally, TOD deeds must be established in the state where the property is located. If you have properties in multiple states, you will have to create separate TOD deeds in each state.
• Management limitations: TOD deeds do not include provisions for management should you become incapacitated. In the event of incapacitation, the courts will determine how your real-estate assets are distributed

Pros and Cons of a Living Trust

Pros

• Comprehensiveness: A living trust can include all types of assets, not just real estate. You can also opt to distribute certain assets at certain times rather than all at once after your death, such as when a beneficiary turns 18.
• Management options: A living trust can establish trustees to manage your assets.
• Flexibility: A living trust can include a plan for incapacity as well as death.

Cons

• Complexity: Setting up a living trust can be complicated due to the intricacies of including multiple asset types.
• Cost: Because living trusts are more complex, they’re usually more expensive to develop and manage.
• Management requirements: A living trust requires a greater level of management to maintain. As you acquire assets, you will need to add them to the trust to ensure they are available to your beneficiaries.

TOD Deed or Living Trust: How To Choose Which is Right for Your Situation?

Your unique circumstances can certainly impact whether a TOD deed or a living trust is right for you. For example, if you own a home that you wish to transfer to your child upon your death and you don't have too many other expensive assets, then a TOD deed may be a good option – especially if you’re looking for a simple, straightforward solution.

But, if you have multiple children who are still minors and you maintain a comprehensive investment portfolio that includes stocks, bonds, savings accounts, and other assets that you wish to actively manage during your lifetime, then a living trust is likely the best option. 

A living trust not only allows you to transfer non-real-estate assets, but you can also designate how and when these assets can be used. For example, you can establish that you want a portion of your assets to be used for your children’s education and wellbeing when they’re young, and then transfer the remainder of the assets to them once they reach a certain age.

Do You Need Help Planning Your Estate and Deciding Between a TOD Deed or a Living Trust?

Estate planning is an important part of your financial journey. It’s how you can ensure you preserve your legacy and care for your loved ones or support the organizations you care about even after your passing.

At Chatterton & Associates, we care deeply about our clients and their families. We understand the intricacies of estate planning, and our incredible team of CERTIFIED FINANCIAL PLANNER™ professionals can help you develop a strategy tailored to your unique needs and wishes.

Sincerely,

The Team at Chatterton & Associates

Although the information has been gathered from sources believed to be reliable, it cannot be guaranteed. Federal tax laws are complex and subject to change. This information is not intended to be a substitute for specific individualized tax or legal advice. Neither Royal Alliance Associates, Inc nor its representatives provide tax or legal advice. As with all matters of a tax or legal nature, you should consult with your tax or legal counsel for advice.