On May 27, 2023 in Estate Planning by Leighton Tyau

The Perils of Transfer on Death Designations and Deeds: Why They May Not Be Wise and Don’t Always Work as Intended

Transfer on Death Designations and Deeds


As an important facet of estate planning, the decision on how to transfer wealth and assets to heirs can be a complex one. Transfer on Death (TOD) designations and deeds have emerged as popular mechanisms due to their straightforward nature and their potential to avoid the rigors of the probate process. While on the surface, TOD mechanisms may appear as a panacea for estate-related complications, it is crucial to delve into their nuances before making a decision. As with most things in life, these mechanisms come with their share of caveats, which could lead to unexpected and potentially detrimental consequences.

Lack of Flexibility

One of the primary reasons individuals choose TOD designations and deeds is to avoid the time-consuming probate process. While this may seem like an attractive option, it can also result in a lack of flexibility, especially when it comes to unforeseen changes in circumstances. This approach also assumes that probate is costly, lengthy, and difficult. If your state has adopted the Uniform Probate Code, this is no longer true for your state. In addition, unless your beneficiaries are reliant upon you for sustenance, speed isn’t critically important.

For example, a simple TOD designation on a bank account or investment account does not allow for contingencies (unless they allow for per stirpes), such as if the named beneficiary predeceases the account holder. In such a case, the bequest would fail and the assets will pass through probate, defeating the purpose of the TOD designation.

Similarly, with regards to simple TOD deeds for real estate, there is no provision for alternate beneficiaries except to pass through the deceased beneficiary’s estate. If the primary beneficiary dies before the property owner, the property will pass to the deceased beneficiary’s heirs and probably be subject to probate, depending on state law.

No Protections for Beneficiaries

TOD designations and deeds do not provide any asset protection or management assistance for the beneficiary. Once the assets or property are transferred, they become fully owned by the beneficiary and are subject to potential creditor claims, government clawbacks/loss of benefits, or mismanagement by a spendthrift heir.

For example, if a beneficiary has significant debts or is involved in a lawsuit, inherited assets through a TOD designation or deed could be seized to satisfy those claims. Moreover, if the beneficiary is a minor or lacks financial acumen, there is no mechanism in place to ensure proper management of the inherited assets and a conservatorship will need to be established.

Potential for Family Conflict

TOD designations and deeds can sometimes lead to family disputes and misunderstandings. When assets are transferred via a TOD designation or deed, the other family members may feel left out or unfairly treated. This can lead to suspicion and animosity, potentially resulting in costly and time-consuming legal battles.

Moreover, if an individual’s circumstances change, such as through marriage, divorce, or the birth/adoption of a child, TOD designations and deeds may not adequately address these changes. For instance, if a parent names their firstborn as the beneficiary of a TOD account and later has additional children, those children would not be included in the inheritance unless the parent updates the designation.

Unintentional Disinheritance

Similar to the example above, a TOD is very rigid in application unless a long form beneficiary designation is submitted. As such, it is very easy to accidentally disinherit a grandchild if their parent (your child) predeceases you. For example, let’s say you have three children, Bob, Mary, and Dillan. Bob has children (your grandchildren). You name all three of your children as pay on death beneficiaries in equal amounts. Sounds good so far, but let’s now assume you and Bob die in the same car crash. Mary & Dillan will inherit the property 50/50 in accordance with the designations. Bob’s children, your grandchildren, are disinherited due to an unfortunate sequence of events.

Incompatibility with Estate Planning Goals

TOD designations and deeds may not be compatible with an individual’s overall estate planning goals. For example, an individual may want to establish a trust to manage assets for their beneficiaries, provide for their spouse during their lifetime, or make charitable bequests. In these cases, TOD designations and deeds can undermine the estate planning objectives, as assets pass directly to beneficiaries without regard for the individual’s larger estate plan.

Potential Tax Implications and Unintended Consequences

TOD designations and deeds can have unintended tax consequences for the estate and the beneficiaries. Assets which pass via a TOD designation or deed are still part of the decedent’s gross estate and are subject to state and federal estate taxes. If the probate estate does not have enough funds to pay these taxes, the personal representative will have to initiate clawback procedures in order to meet the tax obligations of the estate.

Even if the probate estate is liquid enough to pay the taxes, the unintended consequences of these transfer on death designations is to shift the tax burden from the recipient to the rest of the estate. This won’t matter when there is only one beneficiary, but it’s problematic when there are multiple beneficiaries.

Another issue is the incorrect use of lifetime transfers. For example, if your state doesn’t have a beneficiary deed statute, you may think it’s a great idea to title your house as joint tenants with right of survivorship in conjunction with your designated personal representative. This would have the unintended consequence of losing the step up in basis for half the property, causing capital gains tax issues.

Difficulty in Coordinating Assets

When an individual uses TOD designations or deeds and has multiple beneficiaries, coordinating the distribution of the estate can become challenging. For instance, a person may have a mix of TOD-designated assets, assets held in trust, and assets that pass through a will. This can create confusion and complexity when administering the estate as the personal representative needs to pay the final bills of the decedent, pay the creditors and estate administration costs, and divide up the remainder. Because the assets which are transferred on death directly to beneficiaries are not under the control of the trustee or personal representative, this can cause issues when trying to pay these final expenses.

State Law Variations

TOD designations and deeds are governed by state laws, which can vary significantly from one jurisdiction to another. Some states do not recognize TOD deeds, while others have specific requirements for their validity, such as recording the deed or providing notice to beneficiaries. Failure to comply with these requirements can result in the TOD designation or deed being deemed invalid, leading to probate or other unintended consequences.

Moreover, if an individual moves to a different state or acquires property in another jurisdiction, the laws governing TOD designations and deeds may differ, resulting in potential legal complications.

Potential for Mistakes

The simplicity of TOD designations and deeds can also be their downfall. Because they are relatively easy to create, individuals may not seek the advice of an experienced estate planning attorney when setting them up. This can lead to errors or omissions that may not be discovered until after the individual’s death, potentially causing the TOD designation or deed to fail or lead to disputes among beneficiaries.

No Financial or Legal Oversight

When assets are transferred through a TOD designation or deed, there is no oversight. This means that there is no fiduciary, such as an executor or trustee, appointed to ensure that the decedent’s intentions are carried out and that the assets are distributed properly and bills paid. This lack of oversight can lead to unintended consequences or disputes among beneficiaries.


Estate planning is a task that warrants deep consideration, factoring in personal circumstances, financial complexities, and legal nuances. The use of Transfer on Death designations and deeds is not an exception. While these mechanisms do hold the potential to simplify the asset transfer process, the pitfalls highlighted in this article underline the importance of a comprehensive understanding of their functioning and limitations.

Choosing the right strategy requires a fine balance of one’s unique needs and the constraints presented by the legal and financial aspects of estate planning. In this context, the role of professional advice can be pivotal. Estate planning attorneys, financial advisors, and tax professionals can provide the insights and guidance necessary to navigate these complexities and prevent any inadvertent errors or omissions.

Remember, estate planning isn’t just about distributing assets; it’s about preserving harmony among beneficiaries, ensuring that financial obligations are met, and ultimately, about honoring the wishes of the decedent. With these considerations in mind, it is clear that while TOD designations and deeds can offer convenient solutions in certain circumstances, they are not a one-size-fits-all answer to estate planning challenges.

It is crucial to consult with an experienced estate planning attorney to ensure that one’s estate plan is tailored to their unique needs and goals. By considering the potential drawbacks of TOD designations and deeds, individuals can make informed decisions about their estate planning and avoid unintended consequences that could undermine their intended legacy.

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