In the state of Texas, the law provides ways for owners of real property to transfer it to others when they die without going through the probate courts. A Transfer on Death Deed is a simple and cost-effective way to do this.
What is a Transfer on Death Deed?
A Transfer on Death Deed, or TODD, is a legal means for a property owner to easily transfer a piece of real property to someone else outside the probate process. Properties that are subject to a TODD are still in the owner’s possession until the time of his or her death. At that time, the property then passes directly to the beneficiaries of the Transfer on Death Deed.
As a legal document, the Transfer on Death Deed must contain certain information in order to be enforceable.
It must be in writing
Contain the legal description of the property
Contain the name and address of at least one beneficiary
Contain provisions that the transfer of the property will occur upon the grantor’s death
Be executed, witnessed, and notarized
Be recorded during the grantor’s lifetime in the deed records of the county where the property is located
A beneficiary does not need to sign the document or do anything to accept the deed until the grantor’s death and does not even need to be in possession of it since it is filed in the county records.
Do I Still Need a TODD if I Have a Will?
When real property is left in a will, it is part of the estate and needs to go through the probate courts for the beneficiaries to get access to it. This can be time-consuming and costly. A Transfer on Death Deed allows real property to be transferred outside the probate system, which gives beneficiaries easy and quick access and avoids the costs and time of probate. Under our current laws, it can also exclude the property from any potential Medicaid estate recovery.
Although having a TODD is advantageous for transferring property outside of probate, it does not replace a will for other provisions. A TODD only deeds the rights of the real property itself. Its contents and personal property will need to be addressed in a will. A will can further dictate what happens if the beneficiary(s) predeceases the grantor.
The Advantages and Disadvantages of a Transfer on Death Deed
There are important advantages and disadvantages to a Transfer on Death Deed that should be considered.
One of the greatest advantages, of course, is leaving real property to beneficiaries independent of the probate process. But there are also other advantages to transferring property via a Transfer on Death Deed.
A TODD does not immediately trigger a mortgage due-on-sale clause that may have caused a beneficiary to have to pay off the balance of the mortgage debt at the time of transfer. It will also not affect any ad valorem tax or homestead exemptions. A grantor may also revoke the TODD at any time during their lifetime.
But there are also some disadvantages to a Transfer on Death Deed that should also be considered by the grantor, depending on his or her situation.
The law allows for a two-year “claw back” period forcing a property to be probated if there are unpaid creditors and not enough assets in the estate to pay them.
Title companies often refuse to write title insurance policies for properties during that two-year “claw back” period, which may result in the beneficiary being unable to sell the property within a three-year time frame.
A Transfer on Death Deed supersedes a will regardless of the date either was signed. If a will names a beneficiary that is contradictory to the TODD, the beneficiary named in the TODD will receive the property. The only way to change a TODD is to revoke it expressly or revoke it and create a new TODD with a new beneficiary. The revocation is not effective until it has been properly recorded with the county clerk’s office where the property is located.
A Transfer on Death Deed transfers the property to the beneficiary subject to any existing legal encumbrances, conveyances, assignments, contracts, mortgages, or other liens. Consequently, the beneficiary may be subject to paying off any obligations, with creditors potentially forcing a sale or foreclosure.
How Does a Transfer on Death Deed Work When the Grantor is Still Alive?
While the grantor is still alive, the beneficiary has no rights to it. Until the death of the grantor, he or she still has complete control and authority over the property. This gives the grantor the right to revoke the TODD, mortgage the property, sell it, or gift it to another party as long as the TODD has been properly executed, witnessed, and recorded in the public records prior to the grantor’s death.
What if a Grantor Wants to Revoke a TODD?
To revoke a Transfer on Death Deed, the grantor may either 1.) create a new TODD which expressly revokes the previous one; or 2.) create a new TODD revoking the previous document and naming a new beneficiary. Either must be property executed, witnessed, notarized, and recorded in the public records prior to the grantor’s death. If the grantor does not revoke a TODD, the property will convey to the beneficiary of the Transfer on Death Deed regardless of what the will says.
What Happens if the Beneficiary of the TODD is a Spouse and There is a Divorce?
In the case of a divorce, the final divorce decree will revoke the Transfer on Death Deed as long as the decree is properly filed with the county court. If the decree is not properly filed and the grantor passes away, the TODD remains valid, and the ex-spouse remains the beneficiary.
What Happens After the Death of the Grantor?
When the grantor passes away, under state law, there is a mandatory waiting period of 120 hours (five days) before a beneficiary can take control of the property.
If the beneficiary happens to die within this waiting period, the Transfer on Death Deed will lapse and the property reverts to the estate unless 1.) the beneficiary is a parent or descendant of the grantor or 2.) the grantor has named an alternate beneficiary.
If a beneficiary does not want to take ownership of the property, he or she has the right to disclaim it. A disclaimer must be submitted within specific time constraints.
While real property transferred under a Transfer on Death Deed is not typically subject to any creditors’ claims against the grantor’s estate, if there are not enough assets in the estate to cover creditor claims, taxes, and other debts, a transferred property may become subject to probate in order to pay those debts.
What Are Some Common Pitfalls With a Transfer on Death Deed?
Although a Transfer on Death Deed has some advantageous provisions, there are some common pitfalls to consider.
Joint ownership — If the grantor owns the real property with another under joint ownership, the remaining joint owner automatically becomes the owner of the property, even if there has been a TODD executed and filed. This is true for most married couples who own property jointly. A joint ownership deed will supersede a Transfer on Death Deed.
The beneficiary is a minor — When the beneficiary of a Transfer on Death Deed is under the age of 18, the court must appoint a custodian to manage the property until the beneficiary comes of legal age.
The beneficiary wants to sell the property — Unfortunately, because many title insurance companies will not insure a property that has been conveyed under a TODD, it may inhibit a sale of the property for a period of three years after the date of the transfer.
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