REAL ESTATE LAW
By Susan N. Gary
A transfer-on-death (TOD) deed, or beneficiary deed, allows an owner of real property to execute a deed that names a beneficiary who will obtain title to the property at the owner’s death without going through probate. This article examines the advantages and disadvantages of using TOD deeds and details how these deeds work. It provides several typical estate planning scenarios that highlight when the use of a TOD deed may be appropriate and when a different method should be used to transfer real property.
The execution of a TOD deed has no tax consequences.
Pros and cons of TOD deeds. A TOD deed solves many of the drawbacks associated with the other mechanisms available for transferring real property at death. Making a TOD deed an option will help property owners in a variety of circumstances. In contrast with using joint tenancy or a legal remainder interest, a TOD deed creates no present interest in the named beneficiary. This provides several benefits: The owner does not make a completed gift for gift tax purposes; if the owner changes his mind about the beneficiary, the owner can change the designation at any time before death; and because the beneficiary has no interest in the property until the owner dies, the beneficiary’s creditors cannot reach the property. In contrast with the transfer of property under a revocable trust or a will, the transfer of property through a TOD deed is much less expensive. In some states the cost of probate is substantial, and in any state a probate proceeding will cost more than the fees associated with a TOD deed.
The TOD option also may protect owners from unscrupulous relatives. Mary Pat Toups, a California lawyer who has worked with older clients throughout her 30-year legal career, says that older people “often are persuaded to transfer their homes to their children, who then threaten to evict them so they can sell the property.” In her view, a statute authorizing TOD deeds would curb this sort of elder abuse.
A disadvantage of TOD deeds is that people may use them without consulting a lawyer and may make legal mistakes. For example, an owner might name one beneficiary but neglect to provide for the possibility that the beneficiary predeceases the owner. Despite the risk of mistakes on the part of users, these mistakes may be less troubling than the mistakes that occur in connection with the use of joint tenancy as a will substitute. The loss of one’s house during life to the beneficiary or the beneficiary’s creditor is at least as problematic as the risk that the death of a beneficiary prior to the owner will disrupt the owner’s estate plan.
Another concern involves challenges that may occur after the owner’s death. If someone challenges the effectiveness of a deed, perhaps based on an argument that the owner lacked capacity when the owner executed the deed, a court proceeding may be needed to resolve the issue. However, the need for court involvement, or at least the involvement of lawyers, is present in any challenge to a transfer at death, thus the concern is not unique to TOD deeds.
A title company also may be reluctant to issue title insurance if a contradiction or ambiguity exists with respect to the transfer of the property. For example, the deed might direct that the property be transferred to the owner’s son, John, while the owner’s will bequeaths the same property to the owner’s daughter, Johanna. Although the owner may be confused about whether a will can revoke a TOD deed, the law is clear: The TOD deed, if validly recorded and unrevoked by a subsequent deed, controls, and the owner’s will has no effect on the deed. The same result is true with respect to deeds held in joint tenancy, so presumably once the newness of TOD deeds wears off, title companies will not be concerned with this issue.
A reason for some people not to use a TOD deed is that selling the property may not be possible until four months after the owner’s death because in some states anyone with a claim against the property has four months to record the claim. This is a disadvantage as compared with either transferring property through probate or transferring property using joint tenancy with right of survivorship. Depending on the circumstances, a TOD deed will not be the best choice if the beneficiary needs to sell the property soon after the owner’s death.
Missouri has had a TOD deed statute since 1989, significantly longer than any other state, and provides the most useful record of experience. Use of the deed is now wisespread and routine, and although estate planning lawyers typically use the deed for smaller estates, they also use the deed in larger estates, often for property held outside a revocable trust. Title companies in Missouri issue title insurance routinely, despite their initial concerns. Little litigation has occurred over TOD deeds, and no abuses have been reported.
Specifics of a transfer-on-death deed statute. This section explains the basic structure of a statute providing for TOD deeds and identifies questions that legislators should consider in the legislative process.
During the owner’s lifetime, the owner retains full power and control over the property. The property owner who wants to use a TOD deed to transfer property at his death must execute and record the deed before death. All statutes provide that the deed must be recorded to have effect. The owner of property can revoke a TOD deed at any time by executing a subsequent TOD deed or an instrument of revocation. The subsequent deed or instrument of revocation must be recorded for the revocation to be effective.
Existing TOD deed statutes do not indicate the level of capacity required to execute a beneficiary deed. The level presumably should be the same as the level of capacity required to execute a will because a TOD deed, like a will, has effect only at death.
The execution of a TOD deed has no tax consequences. The designation of a beneficiary is not a com-pleted gift because the designation remains revocable. Thus, the designation is not a taxable event for gift tax purposes.
The beneficiary has no interest in the property until the owner’s death, and the beneficiary cannot affect or challenge the owner’s use of the property or the owner’s decision to encumber or sell the property. Delivery of the deed by the owner and acceptance of the deed by the beneficiary are not required, and the owner need not notify the beneficiary when the owner creates or revokes the deed. TOD deed statutes permit the owner to name multiple beneficiaries.
Some TOD deed statutes require a beneficiary to survive the owner to take the property, and some are silent on whether survival is required.
A TOD deed can contain a series of contingent successor beneficiaries to provide for the possibility that several of the named beneficiaries may not survive the owner. When a property owner executes a TOD deed, the owner should consider whether to name one or more contingent successor beneficiaries. The owner should exercise particular care to provide for successor beneficiaries in situations in which the death of a named beneficiary may cause a disruption in the estate plan.
Title vests in the beneficiary at the owner’s death. The beneficiary takes the property subject to all interests affecting the title to which the owner was subject, as well as any interest in the property of which the beneficiary has actual or constructive notice.