Beware Direct Transfer Designations (TODs and PODs)- Part IV: TOD's in Trust Planning

This Blog has addressed in several previous articles the dangers of direct transfer designations such as transfers on death (TOD's) and payable on death (POD's) designations:

• Beware Direct Transfer Designations (TODs and PODs);
• Aging in Place Planning Heightens Necessity of Trust Funding;
• Beware Direct Transfer Designations (TODs and PODs)- Part II: Ohio Transfer of Death Designation Affidavit (TODDA) for Real Estate- Lapse of Insurance Coverage;
• Beware Direct Transfer Designations (TODs and PODs)- Part III- Transfer on Death Deed for Real Estate Results in Loss of Insurance Coverage and Impairment of Asset Value.

These articles recount why immediate transfers on the death of an owner mean risk, especially in an estate plan with an "aging in place" objective.  Regardless, these devices remain popular as inexpensive means to avoid probate and death, and are often seen as an alternative to a trust. 

Unfortunately, they are also frequently used in conjunction with trust planning.  A few years ago, when reviewing a trust for a client, the client explained that her attorney prepared a transfer on death deed for her real estate rather than a deed conveying the real property to her trust.  When asked whether the attorney explained this peculiar choice, the client stated that she received no explanation.  

I recently reviewed another estate plan incorporating a trust, and again discovered the drafting attorney utilized a transfer on death deed, or more accurately, a Transfer on Death Desgnation Affidavit (TODDA) as they are now called in Ohio.  I was surprised that two different clients, with two different lawyers, located in separate parts of the state had designed an estate plan around a trust with what I consider such a peculiar choice for handling the real property.  I searched an estate planning listserv, an electronic bulletin board where attorneys share information, and learned that there is a group of estate planning lawyers that employ transfers on death for real estate and other assets when utilizing a trust because it "retains ownership of the property in the individual name of the client."  

This is "peculiar" because the bedrock of trust planning is changing "ownership" of assets in favor of "deliberate" planning and administration.  In other words, trust lawyers recognize that owning assets in the name of an individual, or jointly in the names of more than one individual, means automatic, forced, and vested rights which often create disadvantages such as the necessity of probate. The disadvantages of individual ownership of property and assets are precisely why trusts exist.  Trusts, by intent and design, typically avoid the automatic transfer of property at the arbitrary moment of death, whether or not that transfer involves probate, by appointing a trustee, a person with a mind and heart, and authority to avoid the disadvantages of mindless and heartless immediate transfer of assets.  

Simply, the automatic transfer of ownership of property on any arbitrary date, such as the date of the owner's death, is fraught with risk and foreseeable risk of loss.  A beneficiary may:

• die with, shortly before, or shortly after the owner, resulting in probate of the assets in the estate of the beneficiary (and not incidentally, a different possible ultimate distribution of the deceased's estate- many parents prefer their estate to pass to their grandchildren rather than a daughter or son-in-law, for example);
• be disabled or incompetent to manage property, or may become so shortly before or after the owner's death;
• be a recipient of means-tested government benefits, and may, as a result of asset ownership  lose necessary government benefits or assistance;
• suffer from impairment risking loss of the assets, such a mental illness, substance addiction, non-substance addiction (gambling), or the like;
• have pledged assets to third parties such as cults or quasi-religious organizations;
• have unavoidable judgment liens, restitution orders, creditors, receivers, or trustees in bankruptcy waiting to collect the inheritance for distribution to third parties.

These examples only scratch the surface of a deep well of possible, foreseeable circumstances that may result in the loss of inheritance to third parties, and/or that may compromise the safety net protecting a beneficiary intended by a deceased. 

These risks are often unavoidable when assets pass automatically and arbitrarily on a specific date, rather than through a  process of evaluation, consideration, and deliberation. Trusts, generally, more capably permit a trustee to maneuver through these circumstances protecting the assets for the benefit of the intended beneficiaries, while disarming third parties from making claims.