Texas TODDs: A Simple Solution with Complex Considerations

As a Texas estate planning attorney, I often encounter clients looking for straightforward ways to pass on their assets without the complexities of probate. The Transfer On Death Deed (TODD) has emerged as a popular tool in Texas, offering a seemingly simple solution for real estate. While TODDs can be incredibly useful, it’s crucial to understand their nuances, benefits, and potential pitfalls before incorporating them into your estate plan.

A TODD is a legal document that allows a Texas property owner to designate one or more beneficiaries who will automatically inherit their real estate upon the owner’s death. Think of it like a “payable-on-death” designation for a bank account, but for your home or land. The key advantage? The property transfers directly to the named beneficiary outside of the probate process.

During your lifetime, you retain full ownership and control of the property. You can sell it, mortgage it, or even revoke the TODD entirely. The beneficiary has no rights to the property while you are alive. This flexibility makes TODDs attractive for many Texans.

The primary appeal of a TODD is its ability to bypass probate. When you pass away, and a TODD is properly recorded, the real estate automatically vests in your designated beneficiary. This means your family avoids the often time-consuming, public, and potentially costly probate court process for that specific asset. This direct transfer can save your loved ones significant time, legal fees, and stress during an already difficult period.

While beneficial, TODDs are not a one-size-fits-all solution and come with important considerations:

• Creditor Claims: Property transferred by a TODD is not shielded from your creditors. Under Texas law, if your estate doesn’t have enough assets to cover debts, taxes, or family allowances, your personal representative or creditors can “claw back” property transferred via a TODD for up to two years after your death. This can cause delays in transferring clear title.
• Incapacity: A significant limitation is that a TODD cannot be created, modified, or revoked by an agent acting under a Power of Attorney. If you become incapacitated and need to change your beneficiary or the terms of the transfer, and you haven’t done so while competent, it’s too late.
• Lack of Flexibility/Contingencies: TODDs are relatively rigid. They don’t allow for complex distributions or contingencies if a beneficiary predeceases you. For example, if you name your sibling as beneficiary, and they pass away before you, the property could revert to your estate (and thus probate) or pass to your sibling’s heirs, which might not align with your wishes. While you can name alternate beneficiaries in the TODD, it’s less flexible than a trust for detailed planning.
• Title Company Issues: Due to the two-year creditor period, title companies may be hesitant to issue title insurance on a property transferred by TODD until that period has passed or until proof of debt satisfaction is provided. This can complicate or delay a future sale or refinance by the beneficiary.
• No Warranty of Title: The Texas TODD statute specifically states that the property transfers without covenant or warranty of title. This means the beneficiary doesn’t receive the same level of title protection that might come with other types of deeds.
• Coordination with Overall Estate Plan: A TODD should be carefully coordinated with your overall estate plan, especially if you have a Will or a trust. Uncoordinated TODDs can inadvertently derail your intentions for other assets or tax planning strategies.

One of the most attractive aspects of TODDs in Texas is their potential utility in dealing with the Medicaid Estate Recovery Program (MERP). Under current Texas law, MERP can only recover assets that are part of the deceased individual’s probate estate. Because property transferred via a TODD bypasses probate, it is generally considered to avoid MERP claims. This can be a significant advantage for individuals who have received or anticipate receiving Medicaid benefits for long-term care.

It’s important to note that Medicaid laws can change, and the interpretation of “estate” for MERP purposes could evolve. However, as of now, TODDs offer a strong layer of protection against MERP recovery for your home.

The cost of preparing a Texas TODD generally ranges from $300 to $1000. However, this cost can be higher if your situation is particularly complicated or requires extensive legal advice beyond the deed itself. This fee typically covers the attorney’s time to draft the deed, ensure it meets all legal requirements, and provide advice on its implications.

While statutory language exists for a TODD in the Texas Estates Code, there isn’t a simple, universally applicable form that is easy for a non-lawyer to use without risking significant errors.

Technically, you could attempt to draft and execute a TODD without a lawyer. However, the consequences of getting it wrong are major. An improperly drafted or executed TODD could be invalid, leading your real estate to go through probate anyway, potentially not to your intended beneficiaries, and incurring higher legal fees to fix the issue. Given that the attorney’s fee for a TODD is relatively minor compared to the potential costs and headaches of an invalid deed or a probate proceeding, it is strongly recommended to hire an experienced estate planning attorney to ensure your TODD is legally sound and aligns with your overall estate plan.

Yes, a TODD can be contested in court, similar to a Will. Common grounds for contesting a TODD include:

• Lack of Mental Capacity: Arguing that the property owner lacked the mental ability to understand the nature of the TODD when they signed it (e.g., due to dementia or other cognitive impairment).
• Undue Influence or Coercion: Alleging that someone pressured or manipulated the owner into signing the TODD against their true wishes.
• Fraud or Forgery: Claiming the deed is fake or contains false information, or that the signature was forged.
• Improper Execution: Asserting that the TODD did not meet the specific legal requirements for a valid deed in Texas (e.g., not properly signed, witnessed, or recorded).

While a TODD is designed to simplify transfers, disputes can still arise, highlighting the importance of proper legal drafting and ensuring the owner’s wishes are clearly documented and legally sound.

A TODD itself does not avoid taxes on the real estate. Here’s what to understand:

• Estate Tax: For most Texans, federal estate tax is not a concern due to high exemption amounts. Texas does not have an inheritance tax.
• Capital Gains Tax: When a beneficiary inherits property via a TODD, they generally receive a “stepped-up basis.” This means the property’s cost basis for capital gains tax purposes is reset to its fair market value on the date of your death, not what you originally paid for it. This can significantly reduce or eliminate capital gains tax if the beneficiary later sells the property, as they are only taxed on the appreciation after your death. This is a significant tax benefit of inheritance generally, not specific to TODDs, but a TODD ensures the property receives this stepped-up basis.
• Property Taxes: The TODD does not affect property taxes during your lifetime. Your homestead exemption, if applicable, remains in place. Upon transfer at your death, the property will be reassessed for property tax purposes based on its new ownership.

Transfer On Death Deeds offer a valuable tool for many Texas homeowners seeking to streamline the transfer of their real estate and avoid probate in Texas. They can be particularly beneficial for Medicaid planning. However, their limitations and potential pitfalls necessitate careful consideration and, ideally, the guidance of an experienced Texas estate planning attorney. A comprehensive estate plan often involves a combination of tools, and a TODD should be one piece of a larger, well-thought-out strategy to ensure your wishes are carried out efficiently and effectively.