When you're doing estate planning, a key decision you'll have to make is how your assets will be distributed upon your death. You have a few options available to you, but two of the most common are transfer on death deeds and living trusts. How do you choose between the two? Both have their own benefits and drawbacks, so it’s important to understand each before making a decision.
Keep reading to learn when a transfer on death deed is the right option, and when a living trust might be better for you and your family.
Transfer on Death Deed Defined
A transfer on death (TOD) deed is a legal document that allows you to transfer ownership of your property to someone else after your death. This can be a useful tool if you want to ensure that your property goes to the individual(s) of your choice—without having to go through probate, which is a formal legal process that recognizes a will.
A transfer on death deed is created in the state where your real estate is located. So, if you are a resident of California but own property in another state, you would create a transfer on death deed in the state where the real estate is located. Furthermore, TOD deeds are not available in every state, so first check whether they are an option in your state before proceeding.
Another thing to keep in mind is that a TOD deed only applies to real estate. So, if you want to leave other assets, such as stocks or savings accounts to someone, you will need to use a different method.
Living Trust Defined
A living trust is a legal document that allows you to transfer ownership of your assets to someone else after you die. It's another way to avoid probate and have more control over how your property is managed after death.
The way it differs from a TOD deed is that a living trust can be used for any type of asset, not just real estate. So if you have stocks, savings accounts, valuable belongings, or other assets that you want to transfer to someone after your death, a living trust is a way to do it.
Another difference is that a living trust can be made revocable or irrevocable. A revocable trust can be changed at any time, while an irrevocable trust cannot be changed once it has been created.
Why Do You Need a Transfer on Death Deed or Living Trust?
What’s the point of having a transfer on death deed or living trust? Why not just use a will?
Although you can use a will to transfer your belongings, doing so means that your property will have to go through probate after your death. This can be a long and expensive process that takes approximately 12-18 months, so avoiding it can be beneficial.
Can You Have Both a TOD Deed and Living Trust?
What happens if you have a living trust, then set up a TOD deed? In general, the most recent legal document takes precedence.
For example, if you have a living trust and then create a TOD deed for 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 changed—even by a TOD deed.
Your circumstances will vary, so consulting with an estate planning attorney is essential for personalized guidance.
Choosing Between TOD Deed or Living Trust
It can be tricky to decide whether a TOD deed or living trust is right for your situation. As we've seen, each has its own advantages and disadvantages.
TOD Deed Pros:
- TOD deeds are usually less expensive than living trusts. This is because they are much simpler to set up
- Easier to revoke or make changes to
TOD Deed Cons
- Not available in every state
- Only applies to real estate
Living Trust Pros:
- Can handle more assets than a TOD deed
- Can be either revocable or irrevocable
- Does more than transfer assets. It assigns trustees, which are people who manage the trust and the assets in it.
- Can be used to plan for incapacity, as well as death
Living Trust Cons:
- More expensive and complex to set up than a TOD deed
- An irrevocable trust cannot be changed after it is created
TOD Deed or Living Trust: Which Is Best for Different Scenarios?
Rachel owns a house in Los Angeles, CA, and wants to have a plan for her property in case she dies. She wants her home to transfer to her son. She doesn't have much else in assets, and wants a simple solution that won't be too expensive. In this case, a TOD deed makes the most sense.
Rick and Kelly have children who are still minors. They also have stocks, savings accounts, and other assets. They want to make sure that their children are taken care of after they die, but also want to have a say in how their assets are managed. They want the assets used for the children's education and well-being. Then, when the children reach a certain age, they want the remainder of the assets to go to them. In this case, a living trust is the best solution.
Still Need Help Deciding Between a TOD Deed Or Living Trust?
Planning for your death is never a fun task, but it doesn't have to be complicated. At Chatterton & Associates, we deeply understand the intricacies of estate planning and our team of professionals can help you develop a strategy tailored to your unique needs and goals.
Contact us to discuss how you can preserve your assets and plan for your family's future.
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.