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Another Estate Planning Option: Transfer on Death Deeds

South Dakota enacted the Real Property Transfer on Death Act in 2014.[1] This provided South Dakotans the opportunity to take advantage of another estate planning option, the transfer on death deed. This allows a person to transfer land at their death to a designated beneficiary or beneficiaries while also avoiding the probate process.

Probate can be costly and time consuming. A transfer at death deed allows you to avoid this process, while also identifying the intended beneficiaries of your real estate. In order to create a transfer on death (“TOD”) deed, a person must be at least 18 years and of sound mind.[2] The deed itself must state that the property will transfer to the designated beneficiary at the property owner’s death, and it must also be recorded with the register of deeds in the county where the property is located.[3] The TOD is created during your lifetime and is also revocable by you at any time.[4]

The designated beneficiary does not have accept or even know about the deed when it is made.[5] Nor does a designated beneficiary have to provide anything to the transferor in exchange for the deed being created.[6] The transfer on death deed only becomes effective upon the transferor’s death.[7] When a transferor dies, the property that is subject to the TOD transfers to the beneficiary, as long as the beneficiary is still living.[8]

A great advantage of a TOD is that it does not affect a transferor’s interest in their property while they are alive.[9] You are free to otherwise transfer or encumber your property, even if a transfer on death deed has been created and recorded.[10] At the same time, it does not create a legal interest in the property for the beneficiary while the transferor is still living.[11]

A transfer on death deed can also be used to split property between more than one beneficiary. In that case, the beneficiaries then share the property equally between them.[12] If you intend a more complicated ownership split, the transfer on death deed may not be the right choice for your estate planning. A transfer on death deed is also a useful tool to retain ownership of land that you wish to flow into an irrevocable trust after your death.

Another aspect to consider is if you intend the property to pass to more than one beneficiary, but one of the beneficiaries passes away before you, then the entirety of the property goes to that one remaining beneficiary upon your death.[13] As an example, if a mother intends for her home to pass on to her daughter and son and properly creates and records a transfer on death deed, the home will be owned equally by the daughter and son upon her death. However, if the son dies before the mother, and the mother does not revoke the transfer on death deed or otherwise specific that the interest should survive, then upon her death, the home will go entirely to the daughter. This might be of concern if the mother wanted some interest of the property to go to her son’s family, such as his wife and children, which is more complicated. In the event the transfer on death deed does designate the property to be distributed to the descendants (children) of a deceased child, and those children are minors, a separate legal conservatorship action may be needed to arrange for signature authority to lease or sell the minor’s share of the property. In such circumstances, using a testamentary trust or a living trust may be a better estate plan tool.

It also important to know that while the property that is the subject of the transfer on death deed does not go through probate, it is still subject to claims by the transferor’s creditors.[14] A transfer on death deed is still subject to estate taxes, as well as capital gains tax.[15] However, due to the step-up in costs basis benefit, the capital gains taxes is limited by allowing the inherited property to be valued at the fair market value time of the transferor’s death, rather than at the time that the beneficiary intends to dispose of the property.

For many, avoiding probate with a transfer of death deed may be beneficial option. An experienced estate planning attorney can help you determine if a transfer on death deed is the right strategy for you.

[1] SDCL 29A-6-401

[2] SDCL 29A-6-407

[3] SDCL 29A-6-408(2-3)

[4] SDCL 29A-6-405

[5] SDCL 29A-6-409(1)

[6] SDCL 29A-6-409(2)

[7] SDCL 29A-6-403

[8] SDCL 29A-6-415(2)

[9] SDCL 29A-6-414

[10] SDCL 29A-6-414(1)

[11] SDCL 29A-6-414(2)

[12] SDCL 29A-6-415(3)

[13] SDCL 29A-6-415(4)

[14] SDCL 29A-6-416

[15] “Transfer on Death Tax Implications.”https://www.findlaw.com/estate/probate/transfer-on-death-tax-implications.html#:~:text=Estate%20Taxes,avoid%20or%20minimize%20estate%20taxes.

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