Estate Planning 101

Transfer on Death in Alabama: How it Works and What You Need to Know | Snug

January 11, 2024

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Estate planning is a complex but necessary process for ensuring a smooth transfer of assets upon death. One of the commonly used tools in estate planning is the "Transfer on Death" (TOD) provision. In this blog post, we will take an in-depth look at TOD provisions under Alabama law.

Understanding Transfer on Death

A Transfer on Death (TOD) provision allows the owner of an asset to designate a beneficiary who will inherit the asset upon the owner's death, bypassing the often lengthy and complicated probate process. The asset can range from financial accounts, such as a bank account or a brokerage account, to physical assets like automobiles.

It is important to note that the named beneficiary has no legal rights to the asset during the owner's lifetime. The asset only transfers to the beneficiary upon the owner's death, making the process quicker and more cost-effective than the traditional probate process.

Transfer on Death vs. Joint Ownership

In Alabama, as in many other states, TOD provisions and joint ownership are both methods used to transfer assets, but they work differently.

Joint ownership implies that two or more individuals have equal ownership in a particular asset. When one owner dies, the surviving owner(s) automatically inherit the deceased's share, bypassing the probate process.

A TOD provision, on the other hand, allows an asset owner to specify a beneficiary who will inherit the asset upon their death, also bypassing the probate process. Unlike joint ownership, the beneficiary does not hold any ownership interest in the asset until the owner's death.

Creditor Protections from Transfer on Death

TOD provisions can offer a degree of protection from creditors. Upon the death of an owner with outstanding debts in Alabama, creditors typically have a set period to stake their claim against the estate. However, assets transferred through TOD provisions bypass probate and are usually inaccessible to creditors unless they can prove a case of fraudulent transfer.

Conflicts Between Your Will and TOD Provisions

Confusion may arise if a will and a TOD provision contradict each other. Under Alabama law, a TOD provision usually overrides a will. This means that if your will specifies that an asset should go to a certain individual, but the TOD provision on the asset specifies a different person, the asset will go to the person named in the TOD provision.

Tax and Debt Implications of TOD

Tax considerations are crucial when implementing TOD provisions. In Alabama, assets transferred via TOD are subject to the same estate tax rules as assets transferred through other means. Alabama does not charge a state estate tax, so only federal estate taxes apply.

As for debts, assets transferred via TOD provisions are typically shielded from the deceased's debts, barring a successful fraudulent transfer case.

Real Estate and TOD in Alabama

Unlike some states, Alabama does not currently allow the use of TOD deeds for real estate. Instead, other instruments such as joint tenancy or revocable living trusts are typically used to avoid probate when transferring real estate upon death.

The Validity of Lady Bird Deeds in Alabama

A Lady Bird deed, also known as an enhanced life estate deed, allows an individual to retain a life estate in a property while passing the remainder interest to beneficiaries. The individual also retains the right to sell, lease, or mortgage the property without the beneficiaries' consent.

However, Lady Bird deeds are not recognized in Alabama. Nonetheless, similar outcomes can often be achieved through the use of a revocable living trust or joint tenancy.

How to Establish a TOD Provision in Alabama

Setting up a TOD provision in Alabama generally involves completing a form provided by the financial institution that holds your assets. Given that real estate cannot be transferred via a TOD deed in Alabama, a different estate planning instrument would be necessary for such assets.

The Limitations of TOD Provisions

While TOD provisions offer significant advantages, they also have limitations. They do not allow for complex asset dispositions or provide detailed instructions as a will or trust might. Also, if the beneficiary predeceases the owner and no alternate beneficiary is named, the asset will typically go through probate.

Revoking a TOD Provision

TOD provisions can be revoked or changed at any time during the owner's life, as long as the owner is mentally competent.

In Alabama, this usually involves completing a form provided by the financial institution. For assets such as real estate where TOD is not an option, the revocation process will depend on the estate planning instrument used.

In conclusion, understanding the laws governing TOD provisions in Alabama is essential when planning your estate. It is advisable to consult with an experienced estate planning attorney to ensure your assets will be distributed according to your wishes.