Readers respond, we provide clarity on trusts and transfer on death instruments

Ilyce and Sam respond: While you are correct that TODs or TODIs are an option for many types of financial accounts, we’re not big fans of TOD instruments when it comes to real estate. They work in some situations but can have unintended costs for the heir who received the property that way.

For example, let’s say a father owns a home and puts in place a TOD, naming his daughter as his successor owner upon his death. And then, he dies. A TOD might work quite well if the daughter lived in the home before his death, and plans to continue living there for several years before selling. However, if the daughter plans to immediately sell the home, she may pay some extra fees when she sells the home.

Why? Depending on where you are, some title companies may charge an additional risk premium to ensure that the buyer gets good title to the home. The title company may require this to cover the risk that estate expenses, such as medical bills or funeral expenses, could become liens against the property. When the daughter tries to sell the home, she would need to pay off the father’s debts, including the mortgage and any estate debts that came about from his death. Otherwise, they could become a problem for the subsequent buyer.

Let’s be clear: TODs allow ownership of the home to flow from one person to another. But it doesn’t discharge a mortgage obligation. For example, let’s assume the father had a mortgage on the home when he died. The TOD would allow ownership of the home to flow to his daughter. But, she would own it subject to that mortgage loan. The mortgage debt does not go away.

When a property goes through probate, the probate court would oversee the deceased father’s estate. The heirs would receive the transfer clear of any debts of the estate. The daughter would still have the father’s mortgage on the home and would have to continue to make mortgage payments, but she wouldn’t have to worry about other estate debts.

Likewise, when the father used a living trust to name his daughter as the owner of the home upon his death, the trust document separates the father’s personal estate from those assets owned by the trust. The trust can transfer ownership of the home without the deceased father’s possible debts. The mortgage debt would continue and the daughter would have to make monthly mortgage payments until she sells the home and pays off the loan.

We agree, it’s technical. The father’s medical expenses, funeral expenses and other personal debts were personal to the father but not the trust.

So, if the daughter received title to the home by means of a TOD and funeral costs or medical expenses were not paid, she could end up being liable for those expenses. For this reason, when the daughter sells the home within two years of her dad’s death, the settlement agents or title companies may charge her a hefty fee for doing the closing. The settlement company will want extra cash to cover themselves in case some unexpected debt pops up and needs to get paid.

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(Ilyce Glink is the author of “100 Questions Every First-Time Home Buyer Should Ask” (4th Edition). She is also the CEO of Best Money Moves, a financial wellness technology company. Samuel J. Tamkin is a Chicago-based real estate attorney. Contact Ilyce and Sam through her website, ThinkGlink.com.)