Effective September 1, 2015, Texas has joined the list of states that now allows you to pass real estate through a Transfer on Death Deed thereby keeping your home outside of probate. Texas has titled this the “Texas Real Property Transfer on Death Act.” You can find the act located in the Texas Estates Code at Chapter 114. This act allows you to pass an interest in real estate in very much the same way that you pass an interest in a bank account or life insurance policy. While this may seem like a great idea, there are several pitfalls to be aware of. My intention with this blog is to inform the reader of situations where it may be an appropriate tool and also to let the reader know what some of the issues may be.
First, lets start with the advantages of the Transfer on Death Deed.
1. Cost: For many clients, there is little to no reason to probate a will other than clearing title to real estate. If you have an estate where the only Probate asset is a piece of real estate, this gives you an alternative to probate that is much cheaper than other alternatives such as a full blown revocable living trust. For a brief synopsis of probate, click here: http://weisingerlawfirm.com/resources/faq-probate/
2. Ease: The Transfer on Death deed allows you to transfer the title by simply recording the Transfer on Death Deed before the grantor passes away and then recording the Grantor’s death certificate upon their death.
3. Flexibility: The Transfer on Death Deed can be revoked at any time during the life of the Grantor. This means you can still sell your property or gift it to someone else. You are not locked in to this gift.
4. Revocability: The Transfer on Death Deed allows you to name a beneficiary without affecting your homestead exemption rights, or affect your ad valorem tax exemptions. Additionally, the deed does not trigger any mortgage “due on sale” clause. It also does not subject the real property to claims or process of a creditor of the designated beneficiary.
Now, lets cover some of the disadvantages or potential pitfalls.
1. Contingent Beneficiaries: The transfer on death deed allows you to name primary and contingent beneficiaries. However, all primary beneficiaries would have to predecease you before any of the contingent beneficiaries would receive the property. For instance, in a will I can leave property to my descendants per stirpes, which means if I have two living children, each will take a ½ interest in the property. However, if one of my children had predeceased me, their ½ share would pass to their children. Not so with the Transfer on Death Deed.
2. Beneficiaries: The transfer on death deed uses the 120-hour rule for survivorship, meaning that as long as the beneficiary survives the grantor by 120 hours the transfer is made to the beneficiary. In most wills, that time period is lengthened to 30 or 60 days to ensure that the transfer is made to the ultimate beneficiary that you designate, such as in a case where you would rather benefit your grandchildren, instead of the beneficiary of your child’s will. (Think about the son-in-law you never liked getting all of your property.)
3. Creditors: The transfer on death deed does not avoid any creditor’s claims or liens or encumbrances. For instance, if the property has a lien or mortgage on it, the beneficiary receives the property subject to that lien or mortgage. Additionally, if there are claims against the probate estate, the real estate in question may have to satisfy those claims and can be pulled back into the estate by an administrator or executor.
4. Minor Children: The transfer on death deed would not be appropriate for leaving property to a minor child as the parents of the child would have to have court approval (possibly being appointed as guardian of the estate) in order to sell, lease, or otherwise manage the property. In the case of a minor, a trust is the better option.
What are the requirements for an effective transfer on death deed?
The deed must be in writing, contain the legal description of the property, include the name and address of the designated beneficiary or beneficiaries and be signed by the Grantor in the presence of a Notary Public. The deed must also state that the transfer of the Grantor’s interest does not occur until the Grantor’s death. Finally, the deed must be recorded in the deed records in the county clerk’s office of the county where the real property is located BEFORE the Grantor’s death.
Does this mean I don’t need a will?
Therefore, the Transfer on Death Deed is not a substitute for a will. As mentioned above, there are many pitfalls which can affect the plan. A well written will can stand as a backup if the above deed fails for any reason. Additionally, the will handles all of your probate assets while the deed only takes care of the specific piece of real estate mentioned. If you have minor children, you also need to think about documents to plan for their care. The best way to cover all bases is with a comprehensive estate plan. Learn more about Estate Planning here: http://weisingerlawfirm.com/resources/faq-estate-planning/ .