In 2009, Indiana passed the Transfer on Death Property Act, which gave Indiana real property owners the ability to designate (but not complete) the transfer of real property to a beneficiary upon the owner’s death without the need for the probate process. The owner retains absolute control of the property during his or her lifetime. The owner may change or revoke the designated beneficiary at any time before the owner’s death. If there is more than one beneficiary named, the owner may also designate how those beneficiaries will take ownership of the property (joint tenants with rights of survivorship, tenants in common, etc.).
The requirements for a valid transfer on death deed in Indiana are that it must be executed by the property owner (or the owner’s legal representative) and recorded with the county recorder where the property is located—both during the owner’s life. The statute does not provide a specific form to be used, so the owner may use a quitclaim or warranty deed. [Note: The attorneys at Griffith Law Group typically prefer that the owner use a warranty deed, in order to preserve any title insurance that may be in place.] Upon the death of the owner, the beneficiary will need to record an Affidavit of Survivorship along with the death certificate and title to the property will be transferred to the beneficiary.
Benefits of a Transfer on Death Deed
Transfer on death deeds can be a very useful estate planning tool when used properly. Some of the benefits include:
- Avoid probate – The limit for “small estates” (where no probate is required) in Indiana is currently $50,000. For most families, the home makes up the bulk of their assets. Using a transfer on death deed effectively makes the property a non-probate asset, which could potentially lower your estate value under the $50,000 limit.
- Automatic transfer – Transfer of title is automatic and thus, the beneficiary can often avoid unnecessary legal and administrative costs.
- Step-up in basis – As opposed to the inter vivos transfers discussed below, the beneficiary gets a step-up in basis. The beneficiary’s basis is the fair market value whenever he or she takes title to the property. This can potentially be a huge tax advantage.
- Avoid confusion – The beneficiary is clearly designated so there is no confusion as to who should get the property upon the owner’s death.
- Cheaper and easier than a living trust – Living trusts require a lot of maintenance, which means attorney’s fees. The primary reason for using a living trust is to avoid probate. Transfer on death deeds accomplish this without the need for maintenance.
Problems with the “Old Way”—Inter Vivos Transfers
Prior to the Transfer on Death Property Act, property owners would often attempt to avoid the probate process by adding an adult child as a joint tenant or tenant in common (an inter vivos transfer). The idea was that when the parents died, the child would already be on title and probate could be avoided. While that is true and sometimes an effective estate planning strategy, it can often lead to unintended consequences.
When an inter vivos transfer is made, that adult child acquires a present ownership interest in the property. Consequently, the child can encumber the property by using it as collateral on a loan. Or, if the child is involved in a lawsuit, the property can become subject to legal proceedings (tort, divorce, bankruptcy, etc.) If the child dies before parent, the property could be subject to creditor claims against the child’s estate.
Additionally, an inter vivos transfer constitutes a completed gift for tax purposes. This could trigger federal gift tax consequences, especially if it exceeds the annual gift tax exclusion (currently $14,000 per year per grantee). Often, because property owners make inter vivos transfers without help from a lawyer, no federal gift tax return is filed, which could result in penalties and interest.
Finally, when using an inter vivos transfer, the tax basis in the property is transferred to the child as well. That means when the child later sells the property, the child will be responsible for capital gains tax based on the parents’ tax basis in the property.
When to Use a Transfer on Death Deed
For married couples, it almost always makes sense to own property as estates by the entireties, which provides creditor protection in addition to automatic rights of survivorship. A transfer on death deed is ideal for an individual whose only primary asset is the home in which he or she lives. Without a transfer on death deed, the property will be considered part of the individual’s estate and, therefore, subject to probate.
A transfer on death deed could also be useful in a second marriage where the owner wishes to keep the home within his or her lineage as opposed to the second spouse. However, it is important to note that the property will still be subject to surviving spouse and family allowances provided under the Indiana Probate Code.
Unmarried couples, when one partner owns real estate in his or her name only, should be cautious about adding their partner to the deed, as it could cause problems in the event the relationship ends. Many departing partners are unwilling to remove their name from title without (often excessive) compensation. A transfer on death deed would allow an owner to name a partner as a beneficiary, but then change or revoke that designation, if the relationship ends.
Changing or Revoking a Transfer on Death Deed
There are two ways to change or revoke a transfer on death deed:
- Complete and record a new transfer on death deed with updated information.
- Complete and record a revocation of the original transfer on death deed.
Unfortunately, there may be a situation where an owner creates a valid transfer on death deed, then subsequently becomes incapacitated and is unable to change or revoke the deed. To guard against this situation, individuals should consider executing a durable power of attorney along with a transfer on death deed. The durable power of attorney would allow another individual to make changes or revoke the transfer on death deed, if necessary.
Before executing a transfer on death deed, it is important to understand how you currently own the property (estates by the entireties, joint tenants with rights of survivorship, tenants in common, etc.). The type of ownership can have an effect on the validity of your transfer on death deed.
Although the intent of transfer on death deeds is to provide an easy, cost-effective alternative to probate transfers, it is imperative that the designation is done correctly and in compliance with the statute. Otherwise, the transfer on death deed could have drastic unintended consequences for your ownership of real property. You should always consult with a knowledgeable real estate attorney when making transfers of real property.