Transfer on Death Deeds

Originally published by Tiffany Dowell.

 

In 2015, the Texas Legislature created statutory guidelines for “Transfer on Death Deeds” in Texas.   The “Texas Real Property Transfer on Death Act” provides the requirements for using a transfer on death deed (“TODD”) in Texas.  Importantly, these statutory requirements apply only to a deed executed on or after September 1, 2015 by a transferor who died on or after September 1, 2015.  Any deeds attempting to directly transfer real property at death prior to that date may be effective, but will not be governed by the provisions discussed below.

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What is a TODD?   A TODD is a legal document that transfers an individual’s interest in real property to one or more designated beneficiaries effective at the transferor’s death.  The TODD requires the property owner (the “transferor”) to name a person (the “beneficiary”) to whom property will automatically transfer at the death of the transferor.

The creation and filing of a TODD does not impact the rights of the transferor while living.  In other words, the transferor retains all rights and control over the property, including the right to sell, transfer, encumber, and use the property. A TODD does not change ownership of or rights to the property until the death of the transferor.

Lastly, keep in mind that in a situation where a valid TODD and a will are in conflict, the TODD will control and the real property will pass in accordance with the TODD, rather than the will.  This is true regardless of which document was created first and regardless of whether the will expressly states it is intended to override the TODD.

Who can execute a TODD?  In order to execute a valid TODD, a person must have contractual capacity.  Note that a person with power of attorney may not create a TODD on behalf of another.

What can be transferred by a TODD? Any real property in Texas may be transferred by a TODD.

What must be included in a TODD?  A TODD must contain the essential elements of a deed and must also state the transfer of real property to a designated beneficiary (or beneficiaries) is to take place at the death of the transferor.  Importantly, the property description that must be included in the deed should match the deed originally granting the property to the transferor. The property description from the Appraisal District, for example, may be insufficient or inadequate to satisfy the necessary requirements of a TODD description.

What must be done with a TODD?  In order to be effective, the TODD must be executed and recorded in the deed records  at the county clerk’s office where the property is located prior to the transferor’s death.  If the TODD is not recorded prior to death, it is not effective.  Importantly,  unlike other deeds, there is no requirement that a deed be delivered to or accepted by the beneficiary.  A TODD is effective if executed by the grantor and filed, without any action by or even knowledge of a beneficiary.

Can a TODD be revoked?  Yes.  A TODD is always revocable, even if the deed states that it may not be revoked.  Any provisions of irrevocably will be ineffective.

In order to revoke a TODD, the transferor may file an instrument of revocation expressly revoking the TODD, or may execute and file a subsequent TODD that revokes all or part of the prior TODD either by expressly revoking or by inconsistency between the two TODDs.  Keep in mind that any subsequent revocation or TODD must be recorded prior to the transferor’s death in order to be effective.

Additionally, the creation of a TODD does not prohibit the transferor to sell, gift, or otherwise transfer ownership of the property during the trasnferor’s lifetime.  Thus, if a transferor were to make a transfer of the property while living, the TODD would essentially be revoked as the transfer of the property would be immediately effective.

One other note on revocation involves divorce.  If a transferor and a designated beneficiary were married when a TODD was created and subsequently divorce, the TODD is revoked only if the final judgment of divorce is recorded in the deed records where the TODD is recorded prior to the death of the transferor.  The mere fact that a divorce occurred would not revoke the TODD.

What other rights are affected by a TODD?  Certain property transfers can impact rights of a transferor.  Here is how a TODD may or may not impact the most common of these rights:

• A TODD does not affect the transferor’s right to claim the property as their homestead.
• A TODD does not affect any property tax exemptions afforded to the transferor (i.e. over 65 years old exemption).
• A TODD does not affect the rights of creditors of the transferor.
• A TODD does not trigger a “due on sale” or similar clause in a mortgage or other type of loan document.
• A TODD does not subject the property to claims of a creditor of the beneficiary.
• Because the TODD does not transfer ownership of the property until the death of the transferor, the property receives a step up in basis adjustment at the transferor’s death.
• Since the TODD is not a completed gift until the death of the transferor, is not considered a taxable event for the purposes of gift taxes.
• The TODD statute states it does not affect the eligibility of the transferor or named beneficiary to any form of public assistance, subject to federal law.  This provision combined with the fact that the TODD does not actually transfer ownership of the property until the transferor’s death means a TODD should not affect the qualification for Medicaid benefits for either the beneficiary or transferor.  In other words, executing a TODD should not trigger the Medicaid transfer penalty. (For more information on Medicaid and long term care planning, listen to my podcast interview with elder law attorney, Kristen Porter, by clicking here.)
• By executing a TODD, the property at issue is no longer considered part of the transferor’s probate estate, meaning that property subject to a TODD should avoid Medicaid Estate Recovery, at least under current law.

What action must the beneficiary take at the transferor’s death?  At the death of the transferor, a beneficiary must record an affidavit of death in the deed records in order to become the legal owner of the property.  In the event the beneficiary wishes to disclaim his or her interest, normal disclaimer procedures under the Texas Estates Code Chapter 122 should be followed.

What are the pros of a TODD?  A TODD can be attractive as a means to transfer ownership of real property quickly and affordably without going through the probate process.  A TODD allows the transferor to keep control over the property during his or her lifetime and allows the transferor to revoke the TODD at any time.  With regard to Medicaid, at least under current law, executing a TODD may allow a transferor to avoid potential Medicaid recovery, while not triggering the Medicaid transfer penalty.

What are the cons of a TODD? First, because TODDs are so new, there is simply not very much law related to these instruments, which may lead to uncertainty for lawyers and clients alike.  One potential downside of a TODD is the recording requirement for both the TODD itself and any revocation of the TODD.  If a transferor fails to property record the document prior to his or her death, it is ineffective and that could lead to unintended consequences at the transferor’s death.  Lastly, people may not understand the concept that a TODD essentially trumps a will if both address the same property, which again could lead to unintended consequences is a TODD was executed in addition to a will.

 

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