Transfer On Death Deeds: The Good And Bad News

Effective August 29, 2000 Ohio has a new law that will allow people who own real estate to pass it on to their loved ones without the hassle or expense of having the real estate going through probate. The law works as follows:

1) A person who owns real estate signs a deed that maintains his ownership interest in the real estate and adds one or more beneficiaries who will automatically own the real estate immediately upon the death of the present owner without the real estate going through probate.

2) After the death of the present owner, an affidavit (a sworn and notarized legal statement) is filed with the county recorder along with a certified copy of the death certificate of the present owner. This conclusively shows that the present owner is deceased and that the transfer on death owners have become the new owners.

3) One or more contingent beneficiaries can be named to step forward to take the share of a beneficiary who may be deceased at the time of death of the present owner. This allows the real estate to go down bloodlines, for example to the grandchildren, if a child/beneficiary is not alive to take his share.

4) The present owner can change his mind at any time while he is alive and change or revoke the transfer on death beneficiaries without their permission or even telling them.

5) The present owner can continue to own, occupy, improve, lease or rent out, borrow against, make mortgage payments, and pay taxes on the real estate as he did in the past.

Although this seems like a great new law, because it was so poorly drafted it could result in significant problems. The biggest problem with real estate is that you deal with title companies, title insurance companies, and mortgage lenders. These real estate institutions are extremely picky that everything has to be just so. After all, in addition to their reputations, each transaction they perform involving real estate could put them at potential risk for loss of hundreds of thousands of dollars. The mortgage lending institution wants the title to the real estate to be good so that if there is a default in the mortgage payments it will be able to foreclose on and sell the real estate to a new owner to cover its potential losses. The title insurance company wants the title to be good so that it won't be sued by a new owner and have to pay out insurance proceeds over a defect in title. And the title company wants to make sure that they prepare a good deed for a new owner so that good title can be passed. Because titles for real estate are public record, any defects will eventually show up and correcting the defects in titles can be a very expensive and time consuming legal nightmare.

The law requires that if you want contingent beneficiaries they must be specifically named on the deed. To illustrate: Bob, Sr. and Sue have three adult children, Bob, Jr., Mary, and Ted. Bob, Jr. has two minor children, Bob, III and Katie, at the time that Bob, Sr. and Sue sign and record a Transfer on Death deed for their home as follows:

Upon the death of the survivor of Bob, Sr. and Sue the home will automatically go to Bob, Jr., Mary and Ted in equal shares. If Bob, Jr. is not then living his share follows bloodlines and goes to Bob, III and Katie. If Mary or Ted are not then living their respective shares goes to the remaining two adult children survivors. Sounds like Bob, Sr. and Sue have pretty well covered all of their bases. Sounds like it but it doesn't work out that way. A year and a half from now Ted marries Betty. Betty seems nice but she has a rather bossy side to her. Two weeks later Bob, Jr.'s wife gives birth to their third child, Freddy. On way home from visiting the new mother and the baby at the hospital Bob, Sr., Sue, and Bob, Jr. are killed by a semi-trailer. Now lets see how this will work out.

Because he is deceased, Bob Jr.'s share will go to his two children, Bob, III and Katie but not to Freddy, Bob, Jr.'s newborn son. Freddy will be disinherited from Bob, Jr.'s share because the new law required that in order for Freddy to take part of Bob, Jr.'s share Freddy had to be specifically named in writing on the Transfer on Death deed. This did not happen because there wasn't time to name Freddy on a new Transfer on Death deed before Bob, Sr. and Sue died. To further complicate matters, because Bob, III and Katie are minors, Ohio law specifically prohibits them from owning real estate in their own names. Remember that real estate institutions are very picky about titles for real estate and they want all legal formalities to be properly covered. This means that the dreaded probate court will have to name a legal guardian to represent the minor children's interests until they reach the age of eighteen. The children's mother will probably be appointed but she will be legally responsible for reporting to the probate court on the children's share until the guardianship is over. If the real estate is sold before the children reach the age of eighteen, the guardianship will continue with this complicated and expensive reporting procedure for the financial shares of the children. Because the reports to the probate court are so complicated and time consuming (and most people are scared to death of handling anything legal, especially because the probate court can fine and even imprison the guardian if things are not handled properly) the mother of these minor children will probably hire a probate attorney to handle the reports to the probate court.

In order for the real estate to be sold, leased, rented, or borrowed against, all of the parties must agree. This means that a committee is automatically set up and everyone must agree to all terms at all times. This seemed fine when Bob, Sr. and Sue made out the Transfer on Death deed because their children always got along very well. But, under the new circumstances that no one considered, it could turn out to be a mess. About a month after the tragic deaths a potential buyer approaches Ted to buy the real estate but because it took so long to get the orders, appraisals, and necessary paperwork in place for the guardianship to become effective the buyer decided not to wait and bought a similar property down the street. Six months later another buyer approaches Ted, but in the mean time the economy in that area has started to decline and housing values have followed. The buyer offers Ted about 15% less than the other offer. Ted calls a family meeting and favors selling the real estate at the offered price. Ted's wife Betty thinks that the offer is too low and that they should wait because things are bound to get better. Mary tells Betty to mind her own business because this does not concern her. Betty does not like being told this and tells Mary that she consulted with an attorney after the first buyer fell through and found out that because she is married to Ted she has a legal power called dower rights which allows her to veto any transaction involving real estate that her spouse has an interest in. Ted then turns to his late brother's wife and asks her as guardian of the minor children what she thinks. She replies that she would have to ask the probate attorney to see if the probate court will approve the sale because she was told that the probate court was the ultimate guardian of her children's interest in the real estate. Needless to say because no one could agree, another buyer was lost and while paying for taxes and utilities, the property sat on the market for another three years before someone else came along and finally bought the real estate for 30% below the original offer. Instead of selling the property when they could have and invested the money they have lost value.

Another problem with the new law is that it has a provision that states that the a Transfer on Death deed will be "liberally" interpreted when it names a beneficiary. This might seem good but remember how picky the real estate institutions are about deeds. In particular, if the deed is not properly drafted by an attorney who understands these new Transfer of Death deeds, most title insurance companies would require a court hearing and order to clear the title of any defects, real or potential, to make sure that the title is good. Without title insurance no mortgage lending institution would lend money to purchase such real estate and no buyer in their right mind would try to buy such real estate in any event.

While the intent behind Ohio's new Transfer on Death deed law was very good, its execution wasn't. It has really created more problems than it has solved. With a living trust there is no problem with probate court imposed guardianships for the real property interests (or any other property interests) of minor children, afterborn grandchildren are not automatically disinherited but instead properly included, there are no dower rights for spouses to interfere with a sale or mortgage, there are no committees to worry about because a single person (such as an adult child) can act as trustee to manage and protect the interests of all of the beneficiaries, and that same trustee replaces the probate court to control the interests of any minor children. As always, it is best to consult with an attorney who understands these potential problems so that they can be headed off in advance.

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