This is a slightly modified letter I just sent to a handful of clients for whom I had prepared transfer-on-death (TOD) deeds. If you have used a transfer of death deed in your estate planning, you should consult your estate planning advisor to be sure you understand the risk involved.
SUBJ: Warning: Transfer-on-Death (TOD) Deeds and Insurance Gaps
As you may recall, a TOD deed is helpful as an estate planning tool because it is a revocable deed that you record before your death that only takes effect at your death, and it passes the property to the persons you named as grantees on the deed. For many people, a house is the only asset that would require a probate, as all their financial assets are in accounts that have beneficiary assignments. A TOD deed is much like a beneficiary assignment for a financial account.
Recently, I have learned about a case that now makes me very reluctant to use a TOD deed, and I am writing to make you aware of the issue. Although the case occurred outside Oregon, I believe the results would be the same here.
In that recent case, an uncle used a TOD deed to leave his house to his niece. When the uncle died, his niece was unaware of the need to get the house insured in her name immediately. And, as luck would have it, the house burned down a few days later.
The uncle’s insurance company got out of paying for loss of the house because their policy ended the minute title to the house transferred from the uncle to the niece – which is to say, the minute the uncle died.
Thus, the uncle’s insurance policy lapsed as soon as the TOD deed took effect, and the house was instantly uninsured. The niece didn’t know to get insurance in effect immediately and so when the house burned down, the niece got ashes instead of a nice check from the insurance company that was collecting premiums until the uncle’s death.
[The actual case opinion from Minnesota is below if you care to read it.]
Although this was in the Midwest, I have done a little reading, and I now think all insurance companies would act the same way everywhere. Thus, when you die with a TOD deed recorded, your homeowner’s policy on that house will lapse.
In short, I understand it, if you use a TOD deed, you are at risk for this loss of insurance coverage if the person who gets your property under the TOD deed doesn’t immediately (a) know of your death, and (b) get a new policy in place.
Now, in most cases, the people you leave your house to probably will know when you’ve passed on – but it’s not a sure thing, for many possible reasons. None of us know when we will die, or where our grantees will be, or how long it will be from the time of our death until word spreads. The people we left our property to might die before us, or at the same time or be overseas or otherwise out of touch for a long time. We can’t foresee all the ways that this insurance gap could arise, especially with people living longer and longer, sometimes with failing memories.
Regardless of the many ways this gap in insurance could occur, it is a big risk. So I have decided to avoid writing new TOD deeds for clients until I find some way to protect against this risk. Although I really liked the simplicity and low cost of TOD deeds, I don’t like them enough to keep using them until we find a way around this problem.
If you too are concerned about this (as I think you should be), you should revisit your estate planning and reconsider the decision to use a TOD deed as part of your estate planning. You should consider whether the ease of the TOD deed is worth the risk that a gap in insurance coverage would occur at your death, leaving you uninsured against what can be a catastrophic loss.
Remember that probate is nothing to fear, especially if you have used beneficiary assignments for your other assets. A one-asset probate for a house or land is usually not too complex or too costly.
For some people, revising their will and revoking the TOD deed might be appropriate. For others, putting the real property into a trust might be appropriate. (Or selling the property and banking the money.) There are many options.
The important thing is that you take some action to ensure that your property doesn’t fall into this coverage gap. Unoccupied houses have a greater risk of loss than occupied houses, so the risk of a coverage loss with a TOD deed increases just when you need the coverage the most.
If you want to discuss this issue with me further, please contact my office to arrange a phone appointment.
s/ John Gear
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