27 Feb TRANSFER ON DEATH (“TOD”) DEEDS
Most of us are familiar with POD or “Pay on Death” provisions in bank accounts, but many are not familiar with real estate passing at death without a will or trust. Among the crop of new legislation being considered by the 84th Texas Legislature is HB 703 – a bill which would establish in Texas for the first time the Transfer on Death deed. It is important to note that a Transfer On Death deed is not the same thing as a “Ladybird” or Enhanced Life Estate deed that is often used in Medicaid planning although a Ladybird or Enhanced Life Estate deed also transfers property on death. It just retains extra powers (i.e., the power to sell, etc.) by the person who owns the property. Since the government (state) often makes a claim against the property of a Medicaid recipient if the property passes by will or intestacy, a Ladybird deed is used so that probate of a will is not necessary to transfer title – thus avoiding a successful recovery by the state against the property.
Under HB703, a person would also be able to execute a deed that will allow the property to pass to a designated beneficiary (or beneficiaries) without the necessity of probate. This sounds great on the surface. After all, who doesn’t want to avoid probate if at all possible?
There is a catch, though, that may make Transfer on Death deeds a less-than-desirable alternative to probate. If a decedent’s estate is insufficient to pay the estate’s debts without the inclusion of the property which is the subject of a Transfer on Death deed, a court proceeding may be brought to enforce the liability by a creditor, a distributee of the estate, a surviving spouse of the decedent, a guardian or other appropriate person on behalf of a minor child or incapacitated adult child of the decedent or any taxing authority. Further, there is a statute of limitations which means creditors, heirs and others have a full two years to bring claims against the property. This has the effect of making clear title to the property uncertain for that two-year period. For that reason, some title companies in Texas have already stated that they will require some sort of court proceeding to clear title when a Transfer on Death deed is used. In that case, the entire rationale for using a Transfer on Death deed–avoiding probate– vanishes. Furthermore, title companies may be conservative and even require a court hearing even if a Ladybird deed is used under the rationale that the state is a creditor. Although this bill may be innocent of attempting to give those with Ladybird deeds a problem, it should be a warning that those with Ladybird deeds should be on high alter and use whatever efforts they can to make sure this bill does not pass. Finally, since the Transfer on Death deed keeps no retained powers (unlike the Ladybird deed) for the grantor, there could possibly be a transfer penalty if the owner of the property (the grantor) applies for Medicaid within five years.
It is always best to consult an attorney before you engage in any estate planning on your own. Sometimes, laws aren’t what they appear to be on the surface.