When it comes to estate planning, especially passing down real property, there are a variety of documents available to facilitate your plan. An estate planning method that been a topic of debate is the Transfer on Death Deed (TODD). A TODD, on the surface, seems simple. You name a beneficiary in your deed to receive your real property automatically upon your death. A TODD is different from joint ownership. If you own real property jointly with another, that joint owner has interest in the real property during their life as well as your life. But a TODD only gives your beneficiary their interest when you pass away. With a TODD, during your life your real property is yours to do what with as you wish. But before you sign on the dotted line, it’s important to understand the drawbacks of the TODD, and why trusts might be a better long-term strategy.
What Is a Transfer on Death Deed and does it Avoid Probate?
In 2024, New York passed a new law allowing individuals to execute a Transfer on Death Deed. As mentioned, a TODD allows you to name a beneficiary who will automatically inherit your real property upon your death. You remain the owner during your lifetime and can revoke the deed or change the beneficiary at any time. More importantly, a TODD avoids probate.
The probate process is initiated when someone passes away with probate assets, including individually held bank accounts, brokerage accounts, cars, and real property.
Probate can be complicated depending on your circumstances and where you reside. For example, probate in Onondaga County is generally quicker and less expensive than probate in New York County. In addition, probate requires certain family members to sign waivers to your probate. Avoiding probate to many individuals can be their main goal in estate planning.
The Hidden Risks of TODDs
While TODDs are legal in many states and easy to execute, they come with serious drawbacks that are often overlooked. A TODD has little to no protection against your incapacity. A TODD only functions upon your death. If you ever became incapacitated (due to illness, accident, or elderly age), your beneficiary named in the TODD has no legal authority to assist you or manage the property. This means possible court intervention or expensive guardianship proceedings to determine who should be responsible for your real property upon your incapacity. In a guardianship proceeding, an individual may be appointed to be your guardian that you do not intend to make financial decisions for you.
Another issue is TODDs offer no contingency planning. What happens if the beneficiary named in your TODD dies before you or refuses the property? Unlike trusts, which can name successor beneficiaries and provide your trustee flexible instructions, a TODD is rigid. If no successor is named, the property may revert to your estate, requiring a probate proceeding.
Why a Trust is a Better Option
A revocable living trust allows you to fully control your property during your lifetime while avoiding probate. A trust allows you to name one or more trustees, family members or trusted friends, and include detailed instructions for your trustees to abide by your wishes and transfer your real property and any other assets within the trust to your beneficiaries.
The benefits to creating trusts do not stop there: you can include asset protection provisions for yourself and certain beneficiaries, delay distributions to minors until they are a proper age and ensure responsible management of your property if you were to become incapacitated.
Revocable trusts are also a flexible tool because a grantor (or person creating the trust) can change or terminate the trust at any point during their life. Irrevocable trusts can also help mitigate potential future creditors such as nursing homes.
Many people are happy to learn that trusts are also private documents. If you were to name a TODD beneficiary in your deed, deeds are part of public records, accessible to anyone to review. Your trust provisions are private between yourself and your trustees.
Lastly, your trustees can continue to manage your property and assist you with your finances if you were to become incapacitated, bypassing the need for a guardianship proceeding.
In Conclusion
Transfer on Death Deeds may seem like a streamlined process, but they often come with long-term headaches. It is important to note that every estate is unique. If you’re considering your options for transferring real estate upon your passing, we suggest you speak with a trust and estates attorney about the options of creating a trust to meet your estate planning goals.
Written by Rebecca E. Alesi
