John S. Stevenson, III, Esq.
© Musgrove Law Firm, P.C. 2015
Beginning September 1, 2015, the probate process in Texas became further simplified by the addition of the “Transfer on Death Deed” (“TOD“) as an estate planning tool. Much like a beneficiary designation on an insurance policy or a “POD” election for a bank account, the TOD allows a grantor to name a primary and contingent beneficiary to inherit real property upon his or her death. Once the TOD is recorded in the real property records of the county in which the property is located, no probate is needed to transfer the real property. As the transfer of real property is one of the primary functions of probate, this enactment is a significant development for both Texas estate planners and real property owners.
The TOD can be especially beneficial in situations where spouses are co-owners of real property in the State of Texas. Before September 1, 2015, when one spouse died, the majority of his or her estate could often be transferred outside of probate because the surviving spouse had been named as a POD beneficiary on bank accounts, retirement accounts and insurance policies, which are referred to as non-probate assets under the Texas Estates Code. However, because most spouses owned Texas real property as joint tenants without a right of survivorship (the default property ownership designation in Texas), the surviving spouse would have to (i) place the property in a Texas land trust or limited liability company; (ii) probate the property as a muniment of title; or (iii) file an affidavit of heirship and a warranty deed in the deed records of the county in which the real property was located in order to transfer and clear title on the property.
After September 1, 2015, spouses that co-own property can now name the spouse that is likely to survive the other spouse as the primary beneficiary on the TOD, with the spouse that is more likely to predecease the other spouse as a contingent beneficiary, thus allowing the surviving spouse and other beneficiaries to avoid the probate process on the first spouse to die (assuming that spouse’s estate consists of tangible personal property, community-owned non-probate assets and Texas real property).
Because the TOD is relatively a new estate planning device in Texas, people interested in creating an effective estate plan will most likely have questions regarding its efficacy and implementation, which will be addressed as follows:
1.) Can I Name More Than One Beneficiary in the TOD?
Yes. Texas law also allows you to name an alternate beneficiary. This is a flexible and highly recommended feature of the TOD.
2.) Does a Beneficiary Under my TOD Have Any Control Over My Real Property During My Life?
No. The TOD is not effective until the grantor dies. If you co-own the real property with your spouse, both you and your spouse will need to co-sign any mortgage encumbering the property or any documents relating to the sale of the property.
3.) If I Have a TOD Do I Still Need A Will? What If I Name Someone Else in the TOD as a Beneficiary of My Real Property?
Yes. Having a Texas will, preferably electing an independent administration, is absolutely essential to controlling the disposition of real and personal property and avoiding a costly and time consuming probate administration. Even if your estate consists of non-probate assets and you have a valid TOD in place, a will is needed as a “catch-all” tool that costs very little to implement – why take the risk? If your will and your TOD are inconsistent, the TOD controls who owns your real property after your death. Note that this applies to wills executed before or after the TOD.
4.) Does a TOD Protect the Property From the Claims of Creditors?
No. All valid liens, mortgages and judgments, as well as claims of other creditors, may be applied against the real property. Mortgages, liens and notes follow the property and will be the responsibility of the new owner after the death of the grantor.
5.) Should I Name a Beneficiary on a TOD that did not personally sign any Mortgage on the Property?
Yes, but only if you believe the mortgage will be paid off at your death. Otherwise, the filing of the TOD in the real property records could trigger the due-on-sale clause in the mortgage, causing the mortgage lender to require the named TOD beneficiary to pay off the entire mortgage or default on payments.
6.) What are the Tax Consequences of a Transfer on Death Deed?
Property transferred by TOD will receive the same treatment as real property passing through probate; although it will avoid probate, it will be included in the grantor’s estate for federal tax purposes. For most estates, there should be no federal estate tax consequences, due to the unified credit amount for 2015 (currently $5.43 million per person). Additionally, the beneficiary named in the TOD should get the “stepped up basis” (date of death value) in the real property, a significant advantage for income tax purposes if the TOD beneficiary desires to sell the inherited real property.
7.) Can a TOD be Revoked?
Yes. A TOD can be revoked by recording a new TOD, or upon the recording of a “Cancellation of Transfer of Death Deed.” Additionally, a divorce decree will invalidate the deed as to a spouse beneficiary and a TOD is revoked when all of the interest in the real property is sold.
A TOD can be a simple, effective estate planning tool to transfer Texas real property at your death. However, it should not serve as a substitute for a valid Texas will or trust. Because the TOD is relatively new and can produce unintended consequences, it is highly recommended that you talk to an experienced estate planning attorney if you are thinking of transferring your Texas real property through a TOD.