Debating Transfer on Death Deed Legislation
|August 2, 2012
One of the main advances in the property law of the 20th century has been the development of asset-specific will substitutes for the transfer of property at death. With these mechanisms, an owner may designate beneficiaries to receive the property at the owner’s death without waiting for probate and without the beneficiary designation needing to comply with the witnessing requirements of wills. Examples of specific assets that today routinely pass outside of probate include the proceeds of life insurance policies and pension plans, securities registered in transfer on death (TOD) form and funds held in pay on death (POD) bank accounts.
These non-probate transfers have become widely accepted. However, there is no generally available, straightforward, inexpensive and reliable means of passing real property, which may be a decedent’s major asset, directly to a beneficiary at death. In an effort to simplify the transfer of property to a beneficiary on the owner’s death without probate, the Uniform Law Commission in 2009 promulgated the Uniform Real Property Transfer on Death Act (URPTODA).
Under URPTODA, real property passes by means of a recorded transfer on death (TOD) deed. URPTODA establishes the requirements for the creation and revocation of a TOD deed and clarifies the effect of the TOD deed on all parties while the transferor is living and after the transferor dies. URPTODA provides optional forms to create or revoke a TOD deed.
Key elements of URPTODA include:
- The TOD deed is not subject to the statute of wills and passes title directly to the named beneficiary without probate.
- The TOD deed must contain all of the essential elements and formalities of a properly recordable inter vivos deed. The TOD deed must state that the transfer to the beneficiary occurs on the transferor’s death and must be properly recorded during the transferor’s lifetime in the office of the recorder of deeds where the property is located.
- The capacity required to create a TOD deed is the same as the capacity to make a will.
- A TOD deed does not operate until the transferor’s death and remains revocable until then. The transferor may revoke the deed by recording a revocatory instrument such as a direct revocation of the TOD deed or a subsequent TOD deed that names a different beneficiary. If the transferor disposes of the property during his or her lifetime, the TOD deed is ineffective.
- Until the transferor’s death, a recorded TOD deed has no effect—it does not affect any right or interest of the transferor or any other person in the property. The TOD deed creates no legal or equitable interest in the designated beneficiary; it does not affect the designated beneficiary’s eligibility for public assistance; nor does it subject the property to the designated beneficiary’s creditors.
- Assuming the transferor dies owning the property and has not revoked the TOD deed, and assuming that the designated beneficiary survives the transferor, the TOD deed passes the property to the designated beneficiary on the transferor’s death.
- Liability of the beneficiary and property for claims against the transferor’s estate is limited to cases where the estate is insolvent.
- A designated beneficiary may disclaim all or part of the transferred interest.
Nat Sterling, ULC California commissioner and chair of the URPTODA Drafting and Enactment Committees, said that before promulgation of URPTODA, some states enacted legislation to enable a TOD deed of real property.
“URPTODA builds on these statutes,” he said. “It provides an uncomplicated, effective and affordable option to pass this important type of asset at death.”
Six states have adopted a version of the uniform act, including Hawaii, Illinois, Nebraska, Nevada, North Dakota and Oregon. The legislation in Oregon went into effect Jan. 1. Twelve other states have pre-existing TOD deed legislation, including Arizona, Arkansas, Colorado, Indiana, Kansas, Minnesota, Missouri (the earliest, in 1989), Montana, New Mexico, Ohio, Oklahoma and Wisconsin. Nevada also had a statute, but legislation passed in 2011 conformed it to the uniform model.
URPTODA has been supported by the American Bar Association (ABA) Commission on Law and Aging and Board of Governors of the American College of Real Estate Lawyers.
The ABA said TOD deeds offer advantages over joint tenancy because the TOD deed does not convey an immediate interest to the beneficiary, the property is not subject to partition or to the beneficiary’s creditors.
“The deed remains revocable, enabling the owner to make a different disposition of the property,” the ABA Commission on Law and Aging said in a letter. “It does not trigger an acceleration clause in a mortgage or a property tax reassessment during the transferor’s life. Nor does it create adverse Medicaid consequences for either the owner or the beneficiary,”
Issues With TOD Legislation
However, not all are convinced the uniform act is a silver bullet. Both the California Land Title Association (CLTA) and California Escrow Association (CEA) opposed TOD deed legislation (AB 699) that was proposed last year. The bill died in the Senate Judiciary Committee. In a letter addressing their concerns, the CLTA and CEA said TOD deeds could be the “new form of fraud against the elderly or unsophisticated real property owner.”
The two associations provided one instance in California where a caregiver, assisted by an attorney from New Mexico, convinced an elderly man to execute a TOD deed. Soon afterward, the caregiver stopped providing care and the elderly man’s health rapidly declined. Eventually, the daughter and son-in-law intervened, eliminating the TOD and getting a conservator involved.
“Had they not intervened in time, the TOD would have been a tool of fraud,” the CLTA and CEA wrote in their letter.
The groups also said the uncertainty surrounding the use of a TOD deed may make it difficult to obtain title insurance. Because many TOD deeds for the same property could be executed over the course of a lifetime due to divorce, remarriage, death and additional children being added, each change could trigger the execution and recordation of a new TOD deed to effectuate a different transfer to different people.
“A ‘stacking’ of these deeds in the public records would create ambiguity and uncertainty as to the status of title and intent of the original transferor,” the associations’ letter stated. “If there is ambiguity in the recorded public records, many title companies may feel compelled to use an abundance of caution and seek a quitclaim deed for every person with a potential real property interest in the property to ensure that clear title can be passed to the new buyer or protect the lender providing a loan.”
Additionally, the CLTA and CEA believe the existence of a TOD deed in the chain of title could impact a lender’s decision to make a loan and add an additional layer of delay and cost to the consumer if the lender required the TOD deed be revoked prior to consummating a new loan.
The two associations were joined by others opposing the legislation, including the California Judges Association (CJA) and California Advocates for Nursing Home Reform. In its letter, the CJA said it understands the intent of TOD deed legislation and to make it easier to do estate planning, but concludes this legislation creates confusion, complexity and litigation that outweigh any benefits.
“Judges commonly see lawsuits resulting from do-it-yourself estate planning,” CJA said. “The interrelation of wills, trusts, joint tenancy, pay on death accounts, beneficiary designations and retirement accounts is complex. Unless being advised by an attorney, people often engage in piecemeal estate planning that produces expense, litigation and confusion instead of the simplicity they imagined would result.”
Opposing TOD deed legislation proposed in California last year, the CJA was concerned with revocation difficulties and delivery of the deed. The legislation would have required any document revoking or changing a TOD deed to be notarized and recorded before death. The legislation also opened the possibility that an executed TOD deed could be recorded without knowledge, consent or intent of the transferor. CJA also said the legislation would make it more difficult for creditors of an estate to recover from the TOD deed asset and would subordinate the estate’s unsecured creditors to the beneficiary’s creditors who have a security interest in the property.
While TOD legislation could be used as a helpful estate planning tool, Debbie Scott of Omaha National Title & Escrow Co. said TOD deeds could pose problems in states such as Nebraska, which have an inheritance tax. Earlier this year, Legislative Bill 536 was signed by the governor adopting the Nebraska Uniform Real Property Transfer on Death Act.
“We believe the legislation would ‘fool’ the consumer into believing that when the death certificate is filed, all is well,” Scott said. “In reality, they would still have to commence a county court proceeding for the determination of inheritance tax and payment just as they would if the property were in held in a trust by a remainder or surviving joint tenant or the like.”
Effective in Missouri
Meanwhile, David Townsend, CEO of Agents National Title Insurance Co., said the uniform act has worked well in Missouri.
“It has not proven problematic with title as long as you have a properly recorded beneficiary deed prior to the death of the grantor,” said Townsend of the legislation, which was enacted in 1989 and modified in 1995. “It’s been very effective to transfer homes when it’s the only part of someone’s estate.”
Townsend said the 2006 ALTA Owner’s Policy provides protection because the term “insureds” named in Schedule A includes “successors to the Title of the Insured by operation of law as distinguished from purchase, including heirs, devisees, survivors, personal representatives or next of kin.” He added that there’s the potential for fraud just like there is with any other deed.
“The competency of the person issuing the deed could be questioned, but we’ve only had one claim involving a beneficiary deed and it was a nephew three heirs back in the chain,” Townsend said.