Transfer-on-Death Deeds
In September 2015, the Texas State Legislature enacted a new statute that formally validated what is called a Transfer-on-Death Deed.
As the name suggests, a Transfer-on-Death Deed is a deed that becomes effective after the property owner dies. In other words, during life, a property owner prepares and formally records a deed that conveys the described property to a named beneficiary, but that beneficiary will not actually own and have full rights to that property until the property owner dies.
The most attractive benefit of a Transfer-on-Death Deed is that it transfers the described real estate without any formal probate procedure. Not only do some families want to avoid probate itself, but a Transfer-on-Death Deed might be a more affordable probate-avoidance strategy than, say, a Revocable Trust.
(As a side note, you might find it helpful to read our article entitled “Is Probate Bad?“)
However, as with most legal strategies, a Transfer-on-Death Deed is a “double-edged sword” with some potential pitfalls that are worth considering.
First of all, if you prepare and record a Transfer-on-Death Deed, you must remember to revoke it in certain circumstances. Why? Because the dictates of your Will do not supersede a Transfer-on-Death Deed. If you prepare and record a Transfer-on-Death Deed transferring property to your son, but later prepare a Will devising property to your daughter, the Transfer-on-Death Deed will still govern, despite your wishes.
Further, it is critical to revoke the Transfer-on-Death Deed when divorce is on the horizon. If you prepare and record a Transfer-on-Death Deed that conveys property to your spouse, but you and your spouse later divorce without having revoked the deed, your spouse would still receive the property after you pass away—even if you updated your Will post-divorce to reflect a different asset distribution plan. This even holds true if you prepare and record a Transfer-on-Death Deed to transfer property to your child and your child’s spouse. If they divorce, then your child’s spouse would still receive the property.
Additionally, if you have minor children, be cautious. If a child receives the property after you pass away by virtue of a Transfer-on-Death Deed, that child might not be able to pay for regular property taxes on the property, which could lead to foreclosure. To avoid this, it may be necessary to pursue expensive court proceedings involving a court-created trust, the appointment of an attorney ad litem, a type of guardianship proceeding, or a type of probate proceeding. The home might be saved—but now your estate’s value has been diminished. Instead of jumping through those hoops, a probate proceeding, a Testamentary Trust, or a previously-prepared Revocable Trust might actually have proven less expensive and more efficient than a Transfer-on-Death Deed.
To conclude, a Transfer-on-Death Deed can function as an outstanding estate planning tool for many families—especially those who wish to avoid probate. The newly-enacted statute provides a firm legal structure that should give Texans some confidence to proceed with a Transfer-on-Death Deed. Having said that, please remember that these deeds are new. Like many new things, they work great in theory, but they might produce some unforeseen problems.