All About Transfer-on-Death Deeds
This article discusses the TOD deed features and limitations, and helps to explain why—more than three years after passing of the new law—the TOD deed has not been widely adopted as a planning tool.
In June of 2014, our state adopted a new law allowing for transfer-on-death (“TOD”) deeds, known as the “Washington Uniform Real Property Transfer On Death Act” or “Act”. The Act was intended to simplify your estate planning by allowing you to transfer real property to your family members or beneficiaries at your death outside of probate. This is similar to pay-on-death designations on a bank or investment account.
Previously, almost all real property transfers on death required a probate proceeding. This new law now provides a simpler and (potentially) more cost effective alternative for transferring your real estate at your death without the time or costs of probate.
The TOD deed, however, has its limitations and should be carefully considered in the context of your overall estate plan. It should not be used simply to avoid probate. There are very few circumstances where the benefits of saving administration costs outweigh the benefits of having a will with more defined planning provisions.
Execution of the TOD deed requires the same mental capacity required to execute a will, and the deed must have essential elements of any other properly recordable deed such as legal description of the property, and signatures before a notary public. The deed must state the transfer to your designated beneficiary (or beneficiaries) is to occur at your death. The deed must also be recorded before your death in the county records where the property is located.
Recording your deed does not vest any present or future interest in your property in your beneficiaries, therefore, the TOD deed is fully revocable during your lifetime—as long as you have capacity to revoke it—and you record the revocation. (The Act does not allow you to revoke your TOD deed by execution of a new will with inconsistent provisions). You, nonetheless, retain your ability to change beneficiaries, or to sell or encumber your property as you see fit.
At your death, your beneficiaries take your property subject to your mortgage, with any liens against the property, and subject to your general liabilities, claims, estate tax obligations (if any), and estate administrative expenses. Your beneficiary has the ability to disclaim the property (refuse or renounce their interest in it) if they do not want the property.
In order to clear the title to the property after your death, your named beneficiaries must record your death certificate in the county real estate records and file a real estate excise tax affidavit with the county assessor to ensure the ownership and contact information are updated for real property taxation.
If you name multiple beneficiaries on the TOD deed, your property passes to the named beneficiaries in equal shares (i.e., in undivided interests as tenants-in-common). Any interest conveyed under the deed is contingent upon your beneficiary surviving you. So, if any named beneficiary dies before you, his or her interest will lapse, and your property will pass to the surviving named beneficiaries in equal shares.
If you are single, have one child, no debts, and your real estate is paid off – using the TOD deed to leave your home to your only child may make good sense, if your goal is to leave everything to your child. If you have multiple children, however, the TOD deed has limitations that may not justify its expected cost savings, because you cannot adequately plan for contingencies.
For example, if one of your children pre-deceases you, the Act provides that your deceased child’s share will lapse. Thus, under a TOD deed, your surviving child would receive your home at the expense of your deceased child’s children (or your grandchildren). This type of contingency planning is best accomplished in your will.
In addition, if your home is subject to debt, the TOD deed has additional limitations. The Act states that your beneficiaries take the property subject to “all conveyances, encumbrances, assignments, contracts, mortgages, liens, and other interests to which the property is subject… .” This means, your beneficiaries will have to deal with your creditors, and may have to pay-off your mortgage or refinance the property in order to keep it, as most lenders will call the entire loan due at your death. Had your property passed to your beneficiaries under your will, your personal representative could have used other assets to pay-off the mortgage or could have sold the house and distributed the proceeds, which may be a better outcome than having your children co-own property.
Community property laws further limit the benefits of a TOD deed for married couples, as the TOD deed would only transfer your community interest in your property. Unless you transfer the property to your spouse, you are creating co-ownership issues for your spouse.
Bringing it all together:
Essentially, the TOD deed provides simplicity and its main advantage is: It allows you to avoid certain costs required as part of a probate proceeding. While avoiding probate may reduce costs, it should not be your primary goal unless it can be done without compromising your planning objectives.
In all, the TOD deed presents many potential traps for property owners, beneficiaries, and practitioners. Therefore, it is vitally important that you, your attorney and your professional advisers understand TOD deeds, and its appropriate uses and limitations.
Even if you and your advisers determine the TOD deed is appropriate for you, you will need to work with you advisers to ensure the deed is coordinated with your broader planning objectives so you can avoid unintended consequences from its use.
Evan McCauley is an attorney with Jeffers, Danielson, Sonn & Aylward, P.S., a Wenatchee law firm. He practices in the areas of estate planning, tax, corporate law, and business succession planning.