Alongside wills and trusts, beneficiary designations are becoming increasingly
popular as part of a complete estate plan. By simply filling out a beneficiary
designation form, individuals can bypass probate and designate who will
receive a specific asset upon their death. Today, a variety of assets
can be transferred through a simple designation form, including bank accounts,
stocks, bonds, retirement accounts, life insurance policies, commercial
annuities and, in some states, even land, vehicles and boats.
While the process seems fairly straightforward, problems can arise and
mistakes can be made when individuals execute these forms without a complete
understanding of how they operate. Therefore, when completing a designation
form, the owner should work with an advisor to ensure the form successfully
achieves his or her goals and to avoid common mistakes.
This article is the final article in a four-part series about beneficiary
designations. Part I discussed the different types of beneficiary designations
and provided basic information in regard to how they operate. Part II
explained the most common beneficiary designation mistakes and how to
avoid them. Part III discussed the complexities related to transfer on
death (TOD) deeds for real estate. This fourth and final article will
discuss common problems and mistakes that can occur when setting up and
utilizing TOD deeds and provide tips and guidance regarding some of the
most common, and most concerning, TOD deed issues.
Please read Part III prior to reading this article in order to better
understand the concepts and solutions discussed in this article. Additionally,
this information reflects general trends among states. It is, however,
important that professionals review state law to determine the treatment
of a transfer on death designation. As this article will illustrate, there
are several potential issues that can arise when executing a TOD deed.
As such, property owners should consult with advisors before executing
a TOD deed and advisors should understand the following areas of caution
in order to avoid problems for their clients.
1. Recording Issues
As discussed in last month's article, a TOD deed must be properly
recorded to be effective. Along with possible errors in the document's
, missing signature, lack of witnesses or notarization, insufficient legal
description and failure to clearly identify beneficiaries by name) there
are also potential timing problems that can arise.
In order for a TOD deed to be effective, most states require that the
deed be recorded before death. Other states have alternative requirements.
California, for example, requires that the deed be recorded within 60
days after execution (see Cal. Prob. Code Sec. 5626). Thus, advisors need
to be aware of the timing rules that exist in the state where the property
is located to work with their clients to ensure that each TOD deed is
recorded in a timely fashion.
Five years ago, Grant consulted with an estate planning attorney to draft
his will. His will provided that Norbert, Grant's favorite nephew,
would inherit Grant's lake house in California. A year later, Grant
and Norbert had a falling out. When Grant became very sick last year,
he consulted with his attorney and decided to update his estate plan to
transfer the lake house to his favorite charity. Grant's attorney
prepared a TOD deed, which Grant signed and then gave to his girlfriend,
Margaret, with instructions to record the deed. Grant passed away the
next afternoon and Margaret was so distraught she forgot to record the
TOD deed. Three months later, Margaret found the deed and brought it to
the recorder's office to have it recorded.
Because the TOD deed was not timely recorded within 60 days of signing,
under California law, the TOD deed will fail. Accordingly, Grant's
favorite charity will not receive the property even though that was clearly
Grant's intent. Rather, the property will pass through Grant's
probate estate where, by the terms of Grant's will, the lake house
will go to Norbert. If the TOD deed had been timely recorded, not only
would Grant's wishes have been fulfilled, but his estate would have
received a charitable estate tax deduction due to the intended real estate
gift to the charity.
In order to avoid a similar undesirable outcome, in time-sensitive situations
it is advisable to hand deliver the TOD deed to the proper county office.
Additionally, the owner should request that the deed be time stamped to
avoid future uncertainties.
There are typically three ways that a TOD deed can be revoked. A TOD deed
can be revoked by: (1) executing a subsequent TOD deed; (2) recording
an instrument of revocation; or (3) selling or transferring the property.
Uniform Real Property Transfer on Death Act Sec. 11 (2009). To be effective,
the revocation must be recorded, typically before the death of the property owner.
Gertrude knew that her health was deteriorating and that she needed to
quickly designate a beneficiary for her home. Knowing that her granddaughter
Jenny would be graduating from college soon and need a place to live,
Gertrude executed a TOD deed naming Jenny as beneficiary. A month later,
Gertrude was transferred to an end-of-life care facility. While there,
she learned that Jenny was moving across the country to start her career.
Gertrude decided to put together a quitclaim deed to convey her home to
her other granddaughter, Zoe, who still lived in town. Unfortunately,
Gertrude passed away one day before the deed was recorded. As such, the
TOD deed was the controlling document and the home was transferred to Jenny.
Again, it is imperative that property owners and their advisors understand
the importance of timing and acting promptly when executing documents
that will contradict or revoke previously recorded instruments—especially
3. Naming and Changing Beneficiaries
One of the most detrimental mistakes is failing to revoke a TOD deed when
there is a change in circumstances that would require a new beneficiary.
The change in circumstance could be a major life event—such as marriage,
divorce, birth, adoption—or it could be an instance where the beneficiary
predeceases the property owner. While some states allow contingent beneficiaries
to be named on a TOD deed (e.g.
, Texas. See Tex. Estate Code Sec. 114.151-5), not all states provide the
same option. If the state does not, it is crucial for the property owner
to revoke a TOD deed if the named beneficiary passes away. If the beneficiary
predeceases the property owner and there are no other living beneficiaries
listed on the deed, then the property will revert to the deceased owner
and may be transferred to his or her probate estate.
It is also worth noting that some states require that the beneficiary
survive the grantor by a certain amount of days in order to receive the
property. Texas, for example, requires that the beneficiary survive the
owner by five days. Tex. Estate Code Sec. 114.103.
Tom executed a TOD deed naming his girlfriend Julia as beneficiary of
his Texas home. A year later, Tom and Julia were in a car accident. Tom
died instantly and Julia passed away a few hours later at the hospital.
As such, the TOD deed designation failed and the home became part of Tom's
Advisors also should be mindful of the transferor's intent. While
states typically allow property owners to give beneficiaries varying shares
of the TOD real estate, in many states, the default under state law is
that the TOD deed will grant equal shares to the TOD beneficiaries as
tenants in common unless the deed specifically states otherwise. (See
Tex. Estate Code Sec. 114.103(a)(3) and Cal. Prob. Code Sec. 5642(b)).
Donna owns a beach house in Malibu, California, but her permanent residence
is located in Indiana. Donna decides to execute TOD deeds for both homes
and name her three daughters as beneficiaries. On the California TOD deed,
she simply lists her three daughters (i.e., she does not include a provision that specifies the amount of each daughter's
share). As such, when Donna passes away, each of her daughters will hold
a one-third interest in the California home as tenants in common. This
works great for Donna because she hopes that her daughters will keep the
home and use it as a shared vacation home when she passes away.
Donna believes that her daughters will choose to sell her Indiana home
upon her death. As such, she leaves a 20% interest to her two married
and working daughters and a 60% interest to her unmarried daughter who
is struggling financially. Donna is happy because the Indiana TOD deed
will be able to provide for her daughters according to her goals and her
daughters' individual needs.
Advisors who are assisting clients in the drafting of their TOD deeds
as part of an estate plan need to know whether the state where the property
is located has an anti-lapse statute, and if so, whether it applies to
TOD deeds. Recall that if a state has enacted an anti-lapse statute and
a beneficiary of property predeceases the grantor, the deceased beneficiary's
share will be passed on to his heirs, rather than be split among other
named beneficiaries. The Uniform Transfer on Death Act was silent as to
whether or not anti-lapse statutes should apply to TOD deeds and left
it to individual states to consider the issue. While some states apply
anti-lapse statutes to TOD deeds (e.g.
, Minnesota. See Minn. Stat. Sec. 507.071-11), in California and Virginia
the anti-lapse statutes do not apply to TOD deeds. Cal. Prob. Code Sec.
5652(2); Virginia Code Sec. 64.2-632. As such, there can be radically
different outcomes in California and Virginia when a beneficiary predeceases
the owner depending upon whether a will was used (in which case the anti-lapse
law applies) or a TOD deed was used (in which case the anti-lapse law
doesn't apply) to distribute the owner's real property.
Gary owns two homes—one in San Diego and one in Monterey. Gary's
will provides that his three sons – Nick, Kevin and Brian –
will inherit the Monterey home. Gary also signed and timely recorded a
TOD deed naming his three sons as TOD beneficiaries of his San Diego home.
Gary's son, Nick, passed away two years ago and Gary passed away last year.
Gary's Monterey home was distributed to his heirs according to his
will. Because California has an anti-lapse statute, the one-third interest
in the property that Nick would have inherited instead passed to his two
daughters. Accordingly, Kevin and Brian now each own a one-third interest
in the Monterey property and Nick's two daughters split his interest
so they each received a one-sixth interest in the home.
The allocation of the San Diego home, however, occurred differently because
that property was transferred in accordance with California's rules
related to TOD deeds. California law expressly rejects the idea of anti-lapse
with respect to TOD deeds. Under the law, Nick's interest lapsed because
he predeceased his father. As a result, Kevin and Brian each received
a one-half interest in their father's San Diego home and Nick's
daughters did not receive a portion of that real estate.
As the above example illustrates, it is crucial to understand how the
TOD deed will operate if one of the beneficiaries predeceases the property
owner. This requires the advisor to understand the state's anti-lapse
statute and thoroughly review the TOD laws to determine if the state's
anti-lapse statute applies. The above example also demonstrates the need
to coordinate and understand the relationship between a TOD deed and a
will in order to effectively transfer real property.
5. Joint Tenancy and Community Property
While a TOD deed will take precedence over a designation made in a will
or trust (as was illustrated in Example 5), a joint tenancy will prevail
over a TOD deed designation (as will laws governing community property
in many states). This could lead to problems and unintended consequences
where a property owner executes a TOD deed for property held as a joint tenancy.
Lucy and Ethel have been lifelong friends. After their husbands passed
away, they decided to become roommates and purchased a home, taking title
as joint tenants. A year later, Lucy recorded a TOD deed naming her son,
Des, as the beneficiary of her interest in her new home. Lucy passed away
five years later. Despite having executed the TOD deed after she took
title as a joint tenant, the deed was ineffective because at her death
her interest automatically passed to the remaining living joint tenant,
Ethel. Since a joint tenancy trumps a TOD deed designation, Ethel, not
Des, received Lucy's interest in the property.
Note that in community property states, the same result could occur. For
example, assume that a husband executes a TOD deed naming someone other
than his wife as the beneficiary of property owned as community property
with a right of survivorship. Upon his death, the TOD deed would be deemed
ineffective, as community property laws would require the property pass
to the surviving spouse. However, the TOD deed can be effective if the
wife gives written consent to give up her community property interest.
As such, in community property states, attorneys with clients who wish
to name someone other than a spouse as a TOD deed beneficiary should make
sure that the client receives proper written consent from his or her spouse
to avoid unintended consequences. These states follow community property
laws in some form or fashion: Alaska (which is an opt-in community property
state), Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas,
Washington and Wisconsin. Note that in some states, like California, a
spouse that has given written consent to relinquish his or her interest
in community property to a TOD deed beneficiary can later revoke that
consent in writing (see Cal. Prob. Code Sec. 5030).
For beneficiaries, property received under the terms of a TOD deed may
not always be desirable. When title vests, a TOD deed beneficiary will
receive the property subject to all of the prior owner's interests.
Thus, all of the owner's previous mortgages, liens and judgments remain
attached to the property. If the beneficiary intends to keep the property,
he or she will have to take responsibility for any liens or other encumbrances
that affect title. Further, when it comes to using the property to satisfy
outstanding debts, creditors of the prior owner take priority over creditors
of the new beneficiary. The types of creditor's claims could include
mortgages, taxes, condominium or home association dues, utility receipts,
property liens and mechanic liens. Note that some states follow the Uniform
Act, which requires that the TOD deed property be available to satisfy
creditors' claims against the prior owner's estate for a certain
period of time. As such, in states that have adopted this section of the
Uniform Act, a TOD deed beneficiary cannot sell the property until a "statutory
claim period" has passed (anywhere from four to 18 months) or until
a title company agrees to insure the property with the understanding that
there are potential creditors' claims looming. Uniform Real Property
Transfer on Death Act Sec. 15; ORS Sec. 93.973. (Note that the legislative
comment to C.R.S. Sec. 15-15-409—Colorado's TOD deed Statute—explains
that "under §15-15-407 the title becomes marketable four months
after death if no interests created in the real property by the owner
are of record or recorded, however a grantee-beneficiary is still liable
for the proceeds for up to three years after the date of death and potentially
longer if fraud is involved.").
Gus had a new roof installed on his home but passed away before paying
the contractor. The contractor filed a mechanic's lien against the
home to secure payment for the new roof. Ben received Gus' home by
way of a TOD deed. Ben will have to pay off the outstanding construction
bill in order to obtain a release of the lien.
Because receipt of property under a TOD deed has the potential to negatively
impact the finances of the beneficiary, the beneficiary's advisor
needs to do research in order to decide if it would be in the beneficiary's
best interest to accept or disclaim the property. This should include
a title lien search and a visit to the county assessor's office to
see if there are any unpaid property taxes. Additionally, it would also
be worth contacting the appropriate homeowner's association to determine
if there are any outstanding dues or fines owed.
The property owner and his advisor should be mindful and consider how
transferring debt-encumbered property under a TOD deed could affect the
beneficiary (especially if that beneficiary is a charity). One solution
is to leave cash to the beneficiary in a will or trust in order to satisfy
any outstanding debts on the property. Alternatively, the property owner
could make sure to satisfy any debt obligations before executing the TOD
deed or leave other assets to the beneficiary instead.
7. Restitution Demands from the Estate
In addition to property liens, the personal representative of the estate
may be able to demand restitution from a TOD beneficiary in order to satisfy
other creditors of the deceased. The effect can be extremely problematic
for the beneficiary.
For example, in California, a personal representative can make a restitution
demand up to three years after the property owner's death. Cal. Prob.
Code Sec. 5676(e). Upon receiving the demand, the beneficiary must transfer
the property to the estate, plus any interest or net income received after
the owner's death. Cal. Prob. Code Sec. 5676(a). This could quickly
become a complicated situation if the beneficiary has encumbered the property,
made improvements to the property or sold it. In California, if the beneficiary
has encumbered the property, he or she must return the property and either
pay off the debt or transfer enough cash so that the debt can be paid.
The beneficiary might be entitled to reimbursement for improvements made
to the property, but only if the improvements were significant. Cal. Probate
Code Section 5676(b).
If the beneficiary sold or transferred the property in California and
the estate makes a restitution demand, then the beneficiary must return
the following: (1) any net income received prior to the transfer/sale;
(2) the fair market value of the property at the time of the transfer/sale;
and (3) interest on the fair market value of the property at the time
of transfer/sale at an annual statutory rate (the rate in California is
currently 10% and the interest runs from the date of transfer/sale to
the date of restitution). Cal. Probate Code Section 5674(a). Because the
estate has up to three years to make a restitution demand, the statutory
interest could be quite costly in some instances (as the 10% interest
may be disproportionate to the actual market return on the property's
value). As such, it could be possible that the beneficiary ends up losing
money due to the statutorily imposed interest.
Thus, effectively, beneficiaries of TOD deeds in California not only become
liable for the debts secured to the property, but can also be liable for
unsecured debts, which are unrelated to the inherited property. Again,
to avoid burdening a beneficiary with unintended harsh consequences, a
property owner who wishes to use a TOD deed to transfer property should
work with an attorney to ensure that there are provisions and funds set
aside in the owner's will or trust that will satisfy judgments and
creditors so that the TOD deed property is not at risk of being subject
to a restitution demand from the owner's estate.
While a properly executed TOD deed can be an effective means of transferring
real property to loved ones, property owners and their advisors must exercise
caution before moving forward with a TOD deed execution. State law must
be consulted and the ramifications for the beneficiary should be considered.
Additionally, due to the complexities in this area, it is highly recommended
that property owners work with advisors to ensure that the TOD deed is
properly executed and to ensure that the TOD deed designation successfully
effectuates their estate planning goals.
Beneficiary Designations – Part IV
Beneficiary Designations – Part III