Using TODs for Real Estate in Maryland

The use of a Transfer on Death (TOD) designation offers a strategic tool when drawing up an estate plan in Maryland. Like a Life Estate, adding a TOD designation to a deed may prove beneficial when weighing the effects related to the “step-up in basis” and the management of property distribution. Typically associated with financial accounts, a TOD allows the direct transfer of assets to the designated beneficiaries upon the owner's death, bypassing the sometimes laborious and costly legal process of probate. When implemented for real estate assets, TODs offer potential advantages for homeowners hoping to streamline the inheritance process and prevent the complexities and delays associated with probate court. Adding a TOD designation to a deed may be a more cost-effective option compared to the creation of a Life Estate.

Step-Up in Basis

One significant benefit of using a TOD designation relates to taxes. Especially true with real estate, such as a home, is the advantage of preserving the step-up in basis. When ownership of a property passes through inheritance, usually the property receives a "step-up in basis” – meaning the home value is determined using the fair market value at the time of the owner's death. The beneficial “step-up” adjustment helps potentially reduce or eliminate the capital gains tax once the property is sold by the heir(s). By contrast, if a homeowner adds a beneficiary to the deed during the owner's lifetime, the property retains the original cost basis, potentially leading to capital gains taxes at the time of sale.

Moreover, the addition of a TOD designation on a property helps to ensure property passes directly to the intended beneficiary(ies) upon the owner's death, allowing the property to retain eligibility for the step-up in basis. This approach helps exclude the property from the owner's probate estate, simplifying the transfer process and potentially reducing estate administrative costs and untimely delays.

Drawbacks of a TOD

Some considerations and possible disadvantages require careful evaluation prior to assignment of a TOD. Chief among these considerations is to ensure the TOD aligns with the goals of the overall estate plan. Evaluation of the entire estate plan is essential to confirm the TOD is consistent and coordinates with other plan strategies, such as the use of trusts or specific directives for asset distribution. For instance, TODs may help to bypass the probate process, however, TODs do not provide the same level of flexibility and control over asset management offered by a trust.

Additionally, the effectiveness of a TOD designation hinges on thorough and precise implementation. The inaccurate recording of beneficiary designations or a failure to update the beneficiary designations in accordance with life changes (due to marriage, divorce, or the birth of children), can produce unintended consequences and disputes among heirs. Along with your financial advisors and trusted legal team, routine assessments of all elements contained in an estate plan are essential to help ensure related estate components, such as a TOD designation, continue to align with your estate plan objectives.

Using TODs Effectively

In summary, use of a Transfer on Death (TOD) designation offers substantial benefits when crafting an estate plan. TODs help preserve the step-up in cost basis, simplify asset transfer, and help to lessen the incidence of probate. We highly encourage you to weigh the advantages against the potential drawbacks when considering your individual overall estate plan strategy. The magnitude of such complex financial decisions necessitates the need for sound professional advice by consulting with your trusted financial advisor and estate planning team. 

At ClearPlan Wealth Management, we help serve as a dependable partner, ready to connect you with trusted professionals during important times of decision, whether considering a TOD or a trust. We take pride in bringing you together with our exclusive network of trusted professionals. Our goal is to team with you and help you make life decisions that align with your wishes and help protect your legacy. Does your financial planner have a detailed blueprint to discuss important life matters surrounding your estate plan and legacy? If not, why not? Please reach out to us today to schedule a consultation!

About the Author:

Troy Brewer has a talent for connecting successful people while serving as a respected mentor on the path to prosperity. By facilitating an all-encompassing approach to wealth management, Troy utilizes his extensive network of resources including investment bankers, estate planners, accountants, and business leaders to develop creative financial solutions for his clients. By fostering meaningful relationships, orchestrating financial strategies, and serving as a trusted confidant, Troy helps his clients achieve their desired life and legacy.

Troy has spent more than 25 years in the financial services industry, focusing on maintaining tight multigenerational relationships through a process-driven approach. As a Chartered Retirement Plans Specialist^® and member of the Baltimore Estate Planning Council, Troy specializes in low-cost investments, complex / multigenerational wealth planning and tax efficiency. His clients include business owners, corporate executives, and affluent families. Learn more about Troy or schedule a consultation.

Any opinions are those of ClearPlan Wealth Management and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. This information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. While we are familiar with the tax provisions of the issues presented here, as financial advisors of Raymond James, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional. Every investor’s situation is unique, and you should consider your investment goals, risk tolerance and time horizon before making any investment. Prior to making an investment decision, please consult your financial advisor about your individual situation. Raymond James does not provide tax or legal services.