Transfer on Death Designations: Is Your Property Protected From Loss?

The situation you’re about to read about sounds like a question that might end up on the Ohio bar exam—but don’t let that stop you from reading! The problem really is an interesting one, and more to the point, something that could end up affecting the property of you or someone you love. Even more importantly, we will tell you how to avoid a loss that you might not have ever seen coming.

If you have been reading this blog for awhile, you have heard about transfer on death accounts, which allow an account holder to place a designation on a bank or other financial account so that, when they die, the account automatically passes to the transfer on death (TOD) designee. But TOD designations aren’t only for bank accounts. You can transfer securities, vehicles and even real estate with a TOD designation, which is a beneficiary designation. A significant advantage of a TOD designation is that it allows the asset in question to pass immediately, and avoid the probate process.

Which brings us to our question: What happens to the property insurance if an interest in real estate transfers on death? Is the property still insured for loss until the end of the term, or does the insurance terminate on the death of the person transferring the property, or at some other time?

The Walker Case

In the 2019 Hamilton County case of Walker on behalf of Estate of Walker v. Albers Insurance Agency, (the Walker case), this question, and many others, arose. Here are the basic facts of the case: a woman, whom we’ll refer to as the decedent, died without a will in Hamilton County. The decedent did own a ⅕ interest in a piece of real estate consisting of a house and land. Shares of that interest were transferred on death to six others, five of whom transferred their interests back to Walker, the plaintiff in this case. Walker also owned an interest in the property prior to the decedent’s death, and was appointed commissioner of the decedent’s estate afterward.

Although the decedent only had a ⅕ interest in the house, she was the only person listed on the homeowner’s policy. Several months after her death and the administration of her estate, the house was seriously damaged in a fire. Walker tried to make a claim for the loss, and the insurance company denied coverage, as Walker was not a named insured.

The Court of Appeals suggested that under the language of the specific policy in question, had the loss occurred during the administration of the estate, it might have been covered. But the policy language also seems to contemplate the real estate being part of the probate estate, which real estate with a TOD designation is not.

The outcome in the Walker case was not favorable for the new owner of the decedent’s interest in property. It also raises the question of how to ensure that your loved ones will be protected in the event of loss to a property that you transfer with a TOD designation.

Protecting Your Loved Ones’ Inheritance From Loss

If you are transferring an interest in property to your loved ones using a TOD designation, you could contact your insurance agent to add your designees to the policy effective upon the execution of a TOD designation affidavit. As an alternative, you could advise your designees that, in the event of your death and the transfer of the property to them, they need to get insurance for the property in their own names.

There are potential problems with this approach. For instance, what if you have two children and transfer the property to them via TOD designation affidavit upon your death, but only one of them obtains insurance? Will the person who took out an insurance policy be compensated for the whole loss, or only part of the loss, in the event of damage to the property?

Fortunately, there is an approach that is both simple and avoids potential legal wrangling with an insurance company. If you place the real estate in a living trust during your lifetime, there is no need for a TOD designation at all. The trust can purchase an insurance policy for the real estate. That policy will not terminate on your death. If there is damage to the property before your death, during the administration of your estate, or afterward, the interests of all of your beneficiaries will be protected without having to take any actions.

If you have questions about the pros and cons of transfer on death designations, or how a trust can protect your loved ones’ interests, contact an experienced Ohio probate attorney to discuss your options.