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 the owner's goals and to avoid common mistakes.
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. This
article will delve deeper into the complexities of beneficiary designation
deeds, also called transfer on death (TOD) deeds, for real property and
vehicles. Specifically, this article will explain the process required
to set up a TOD designation, the implications for both the owner and the
beneficiary and how to revoke a TOD designation. Next month, Part IV will
present issues related to TOD deeds and how to avoid possible mistakes.
The information in this article reflects general trends among states.
It is, however, important that professionals look to state law to determine
the treatment of a transfer on death designation.
Transfer on Death Deed – Land
Non-probate transfers of particular assets through beneficiary designations
have become increasingly common and recognized as effective tools in comprehensive
estate plans. Retirement plans, life insurance, stock portfolios, bank
accounts and commercial annuities are just some examples of assets that
can be distributed easily and without probate through beneficiary designations.
A transfer on death (TOD) deed enables an owner of real property to execute
a deed during life naming the individual who will receive title to the
property upon the owner's death. Just like a regular deed, the TOD
deed must be prepared, signed, notarized and recorded by the property
owner ("owner"). In addition, the deed must state that it will
not go into effect until the owner's death. However, unlike regular
deeds, TOD deeds can be revoked, as the beneficiary does not have a present
interest in the property. Upon the death of the property owner, assuming
there have been no revocations, the beneficiary will receive title to
the property without the involvement of the probate court. If the decedent
also listed the property in a will or trust, the TOD deed will control
the distribution of the property regardless of when the will or trust
Not all states allow TOD deeds for real estate. While Missouri became
the first state to allow TOD deeds in 1989, it wasn't until the early
2000s that the trend picked up speed and other states began to create
mechanisms allowing non-probate transfers of real estate to a designated
beneficiary. In 2009, the National Conference of Commissioners on Uniform
State Law adopted the Uniform Real Property Transfer on Death Act ("Uniform
Act"), prompting some states that did not already have statutes allowing
TOD deeds to pass new laws. Currently, a little over half of all states
allow TOD deeds. The states that currently allow TOD deeds are: Alaska,
Arizona, Arkansas, California, Colorado, the District of Columbia, Hawaii,
Illinois, Indiana, Kansas, Minnesota, Missouri, Montana, Nebraska, Nevada,
New Mexico, North Dakota, Ohio, Oklahoma, Oregon, South Dakota, Texas,
Virginia, Washington, West Virginia, Wisconsin and Wyoming. Each state
has its own rules and regulations governing the use of TOD deeds. As such,
it is important to review the law of the state where the property is located
before moving forward with a TOD deed.
Transfer on Death Deed – Vehicles
Additionally, some states allow car owners to name transfer on death beneficiaries
for their vehicles. To be effective, the designation must be listed on
the vehicle's certificate of title. Like TOD deeds for real property,
designating a TOD beneficiary of a vehicle does not give the beneficiary
a legal interest in the vehicle. The vehicle owner can still sell the
vehicle, give it away or name someone else as the beneficiary.
Like TOD deeds for real property, not all states allow TOD designations
for vehicles. The states that allow TOD vehicle registration include:
Arizona, Arkansas, California, Connecticut, Delaware, Illinois, Indiana,
Kansas, Missouri, Nebraska, Nevada, Ohio, Vermont and Virginia. In addition,
California, Indiana and Ohio allow individuals to use TOD beneficiary
designations for small boats.
Typically, a TOD deed must follow traditional deed formalities with respect
to the recording process. The deed must be in writing, signed by the owner
and include a legal description of the land (typically by a surveyor).
Uniform Real Property Transfer on Death Act Sec. 9 (2009). Additionally,
it must contain the names and addresses of the beneficiaries and state
that the transfer of the owner's interest will not occur until the
owner's death. However, unlike traditional deeds, delivery and acceptance
by the designated beneficiary are not required for TOD deeds. Uniform
Real Property Transfer on Death Act Sec. 10 (2009).
In many states, the TOD deed must be recorded prior to the death of the
property owner. Other states have alternative timing requirements. For
example, in California, the deed must be recorded within 60 days of being
signed and notarized and it may be recorded even after the death of the
transferor. Cal. Prob. Code Sec. 5626(a).
The process of executing a TOD deed has very different ramifications than
the creation of a joint tenancy. When a joint tenancy deed is executed,
the beneficiary becomes a full legal owner immediately. Unlike a joint
tenancy, when a TOD deed is executed the beneficiary does not immediately
receive a vested interest in the property. As such, the property owner
is able to sell, refinance or change the beneficiary at any time. With
a TOD deed, the designated beneficiary cannot challenge the owner's
use, encumber the property or subject it to creditor's claims. Additionally,
when a joint tenancy deed is executed, the original property owner is
required to file a gift tax return. No such action is needed when a TOD
deed is executed, because the beneficiary is not receiving a present interest
in the property. Uniform Real Property Transfer on Death Act Sec. 12 (2009).
Because of the number of requirements and deed formalities, property owners
should consult with an advisor to ensure that proper procedures are followed.
Additionally, because laws vary by state, an attorney should look to the
laws of the state in which the property is located to determine what is required.
TOD Deed Beneficiaries
The beneficiary of a TOD deed can be a person or an entity (e.g., an organization,
institution, church, charity, etc.). Uniform Real Property Transfer on
Death Act Sec. 2 (2009). While an owner can designate multiple beneficiaries,
including primary and contingent beneficiaries, beneficiaries cannot be
a designated class of persons in some states. For example, in California,
if an owner executes a TOD deed and designates "all of my then living
children" as the beneficiaries, the TOD deed will be invalid. Cal.
Prob. Code Sec. 5622.
Beneficiaries must be specifically identified by name, address and, often,
their relationship to the property owner. If, upon the owner's death,
the beneficiary cannot be identified with certainty, then the property
could be transferred to the owner's probate estate. As such, advisors
should review the TOD deed before it is recorded to ensure that adequate
identifying information has been provided.
When drafting a TOD deed, advisors should be mindful of the transferor's
intent. While state law allows a property owner to leave varying shares
of the real estate to different beneficiaries, the default under state
law in many states is that the 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
Jesse executes a transfer on death deed for his Texas home and names his
sons, Wyatt, Billy and Butch as beneficiaries. Upon Jesse's death,
Wyatt, Billy and Butch will each hold a 1/3 interest in the property as
tenants in common unless the deed made specific provision to allocate
the ownership differently.
As previously mentioned, the beneficiaries do not need to accept the transfer
for the deed to be effective, as delivery and acceptance are not required.
Thus, title to the TOD deed property will vest upon the owner's death.
If desired, the beneficiary can disclaim the property interest (note that
state law will govern the timing and requirements to properly disclaim
the interest). In order for a beneficiary to claim title, most states
require evidence of the owner's death, typically in the form of a
death certificate or an affidavit of death. Cal. Prob. Code Sec. 210.
Because a TOD deed does not contain traditional deed warranties, the beneficiary
will receive the title subject to all of the original owner's interests.
Uniform Real Property Transfer on Death Act Sec. 13(b) (2009). Thus, all
of the owner's previous mortgages, liens and judgments remain attached
to the property and will be the responsibility of the beneficiary. This
can create potential financial issues and risks for the beneficiary. Next
month's article discusses this issue and explains how advisors can
prevent potential financial hardships for TOD deed beneficiaries.
When a property owner executes a TOD deed, the owner has not made a completed
gift for gift tax purposes (the beneficiary does not have a vested present
interest). Uniform Real Property Transfer on Death Act Sec. 12 (2009).
As such, the execution of the TOD deed does not have gift tax implications.
The property will be considered part of the owner's estate at death
for estate tax purposes. Note that if the owner designates a qualified
charity as beneficiary of a TOD deed, the owner's estate will receive
a charitable estate tax deduction.
The designated beneficiary of a TOD deed will receive a step-up in basis
(i.e., the basis of the property will be equal to the property's value
on the date of the owner's death). As such, the beneficiary may be
able to avoid capital gains tax implications.
Restrictions on Property Type
Some states restrict the type of real property that can be transferred
under a TOD deed. For example, in California a TOD deed "can only
be used to transfer (1) a parcel of property that contains one to four
residential dwelling units, (2) a condominium unit or (3) agricultural
land of 40 acres or less, which contains a single family residence."
Cal. Prob Code Sec. 5610. California does not permit the use of a TOD
deed for commercial and industrial properties, vacant lots or plots of
land or farmland that do not contain a single-family residence. In contrast,
Texas law permits use of a TOD deed to transfer not only real property,
but mineral and timber interests as well. Tex. Estate Code Sec. 114.002(a)(5).
As such, practitioners need to have a thorough understanding of this area
of law in the state where the property is located to ensure that a TOD
deed is appropriate. Additionally, advisors and landowners should monitor
the property in case there is a change in the property's use. Issues
could arise if use of the land changes such that a TOD deed would be ineffective
upon the death of the owner.
Jesse executes a TOD deed in California for a parcel of land containing
three residential dwellings. Jesse designated his two beloved nieces as
the beneficiaries of the deed. As the years went by, Jesse decided to
build two new homes on the property for his nieces to call home. Some
time later, Jesse passed away. At the time of his death, the property
subject to the TOD deed contained five residential dwellings. Because
a TOD deed in California cannot be used for parcels of land containing
more than four residential units, the designation would fail and the property
would become part of Jesse's probate estate.
In order to avoid unintended consequences, it is important for property
owners and their advisors to work together when executing TOD deeds to
ensure that the deed will properly distribute the property.
Revocation of Deed
While state law may differ slightly, most states provide that a TOD deed
can be revoked by taking one of three actions. Uniform Real Property Transfer
on Death Act Sec. 11 (2009). First, the property owner may record a subsequent
TOD deed. When there are two or more TOD deeds, the most recently executed
deed is operative. To be effective, the deed must be properly recorded.
Uniform Real Property Transfer on Death Act Sec. 11(A)(1)(a) (2009).
The second way to revoke a TOD deed is to execute an instrument of revocation
(also referred to as a revocation deed). The revocation must occur before
the death of the owner. Uniform Real Property Transfer on Death Act Sec.
11(A)(1)(b) (2009). The third way that a property owner can revoke a TOD
deed is by selling or transferring all of the owner's interest in
the property and properly recording the sale or transfer. Uniform Real
Property Transfer on Death Act Sec. 11(A)(1)(c) (2009).
Note that some states may provide additional ways that a TOD deed may
be revoked. For example, in Minnesota, Oregon and Texas, if a property
owner names a spouse as beneficiary of a TOD deed and then they later
divorce, a final judgment from the court dissolving the marriage will
effectively revoke the TOD deed. Minn. Stat. Sec. 524.2-804; Or. Rev.
Stat. Sec. 93.981 (2011); Tex. Estate Code Sec. 114.057(c). The judgment
must be recorded in the county where the TOD deed is recorded prior to
the death of the property owner. California does not provide a similar
provision. The Uniform Act does not provide that a TOD deed will be revoked
upon divorce. The Uniform Law Commission specifically provided that this
issue was to be left to states to decide for themselves. Uniform Real
Property Transfer on Death Act, Legislative Comm' to Sec. 13 (2009).
Most states follow the Uniform Act's guidance and set forth that the
capacity required to make or revoke a TOD deed is the same capacity required
to execute a will. Wash. Rev. Code Sec. 64.80.050; W. Va. Code Sec. 36-12-8;
Uniform Real Property Transfer on Death Act Sec. 8 (2009). However, it
is again worth checking the state's law on this issue, as some states
adhere to stricter capacity standards. California, for example, follows
a higher capacity standard, requiring that grantors in California possess
capacity to contract when executing or revoking a TOD deed. Cal. Prob.
Code Sec. 5620.
Whether or not an agent acting under a power-of-attorney can act to execute
or revoke a TOD deed will depend on state agency laws (see Illinois Power
of Attorney Act, 755 Ill. Comp. Stat. Sec. 45/2-9). It is clear that in
some states, like Illinois and Texas, an individual holding a power of
attorney cannot execute a TOD deed where the property owner lacks capacity.
810 Ill. Comp. Stat. Sec. 27/35 (2012); Tex. Estate Code Sec. 114.054(b).
However, Minnesota does allow a TOD deed to be executed by an attorney-in-fact.
Minn. Stat. Sec. 507.071-7. Therefore, it is important to research state
agency law before allowing an agent of the property owner to execute a TOD deed.
Advantages of TOD Deeds
In the states that currently allow TOD deeds for real property, there
are a number of benefits that may be realized. One of the obvious benefits
is that a TOD deed allows real estate to be transferred without the often
expensive and time-consuming probate court process. In contrast, when
real property is transferred through a will or intestate succession, probate
action in state court is required. While a TOD deed is not the only way
to transfer real property at death without involving the probate court
(e.g., joint tenancy or revocable trust), there are some reasons why individuals
may benefit from, or prefer, a TOD deed.
First, unlike the creation of a joint tenancy, filling out a TOD deed
does not give the beneficiary a vested, present interest in the property.
Thus, there are no gift tax implications when executing a TOD deed. In
contrast, creating a joint tenancy qualifies as a completed gift for gift
tax purposes. Additionally, because the beneficiary does not have any
legal rights in the TOD deed property, the property is not subject to
the claims of the beneficiary's creditors and the owner has flexibility
to change the beneficiary designation at any time. Alternatively, when
a joint tenancy is created, the action is irrevocable and, because the
new joint tenant is added to the title, any judgments, liens or debts
of the new joint tenant could attach to the property.
Additionally, when taking into account the tax implications for the beneficiary,
a TOD deed is likely preferable to a joint tenancy. When property passes
to a beneficiary under a TOD deed, the beneficiary receives a step-up
in basis (i.e., the basis will equal the value of the property on the
date of the original owner's death). Alternatively, when an individual
is named a joint tenant during the owner's lifetime, the individual
receives a carry-over basis (i.e., the basis of the original owner) for
their undivided interest in the property.
A revocable trust is an additional tool in the estate planning toolbox.
Designating a beneficiary under the terms of a revocable trust will not
create a completed gift for gift tax purposes and can avoid probate upon
the owner's death. However, the fees associated with drafting an effective
trust can often make this option less than ideal for individuals with
limited means or for those whose only asset is real property. Additionally,
using both a revocable trust and a TOD deed may be an effective means
of drafting a comprehensive estate plan. Advisors should work with their
clients to find a solution that will successfully meet the needs and goals
of their clients.
A properly executed TOD deed can be an effective means of transferring
real property to loved ones. Each state, however, has its own rules governing
the use of TOD deeds. Because states differ in regard to the types of
property that can be transferred, the capacity required and revocation
standards, it is important to look to the laws of the state where the
property is located when preparing a TOD deed. Additionally, due to the
state law distinctions, complexities and requirements, someone considering
a TOD deed to transfer property should work with an advisor who is knowledgeable
about the various state law requirements to ensure that the property is
transferred as intended and the goals of the owner are accomplished.