Is New York’s New Transfer on Death Deed Your Answer to Avoiding Probate?

New York now has a Transfer on Death deed, which goes into effect on July 20, 2024. Traditionally, if a client wants to avoid probate for their real estate, we must create a trust and transfer the deed into the name of the trust. A trust avoids Surrogates Court and the property passes seamlessly to beneficiaries.

So, does New York’s new Transfer on Death deed mean you don’t need a trust?

What is a Transfer on Death Deed?

A Transfer on Death (TOD) deed allows a property owner to designate one or more beneficiaries to automatically receive the real estate when the owner dies, without the property having to go through probate. It does not affect the ownership rights until after death and can always be revoked.

A Transfer on Death (TOD) deed must meet specific requirements to be effective and legally binding. The deed must include language that the transfer to the designated beneficiary occurs at the transferor’s death. All deeds require a notary, but this particular deed requires two witnesses (like a Will). Crucially, the deed needs to be properly filed with the relevant county office before the owner’s death to be recognized.

Who can Use a Transfer on Death Deed?

Any owner of real property can use a TOD deed. This includes tenants-in-common and owners with rights of survivorship.

If a TOD deed is in place but the owners have rights of survivorship, the surviving owner(s) continue to hold the property upon one owner’s death, with the TOD deed taking effect only after the death of the last surviving owner. If the property is held by joint owners with rights of survivorship, all living owners must revoke for the revocation to be valid.

Right of First Refusal and Partition Sales

The drafters clearly understand that having “nobody in charge” can lead to litigation. Therefore, the statute establishes statutory fixes to address specific scenarios and rights related to properties that can further impact inheritance.

Right of First Refusal

When property is inherited by multiple beneficiaries, they become “co-tenants.” The statute allows existing co-tenants the opportunity to match any offer received by another co-tenant from an outside buyer. If one co-tenant wants to sell their share, they must first offer it to the other co-tenants under the same terms and conditions as offered by the external buyer. The co-tenants have 180 DAYS to match the offer.

If the other co-tenants are not properly notified of the offer and the sale is completed, the other co-tenants shall have the right to purchase the shares from the non-relative co-tenant for the price paid plus any applicable interest at a rate of 2% per 10 annum. This right expires one hundred eighty days after the other co-tenants are made aware of the sale.

This right of first refusal is intended to prevent outsiders from easily acquiring interests in family-owned or closely held property, thereby keeping the property within the family. However, this right of first refusal severely limits the marketability of the property because any sale to an external party is contingent upon the refusal of family members to match the offer – and they have 180 days to do so! A lot can change in 6 months and as we all know: time kills deals.

Restrictions on Partition Sales

The statute restricts the ability to initiate partition actions (the legal division of property among co-owners that allows them to sell their portion) unless the party seeking partition inherited their share. This provision protects family properties from being easily fragmented and sold to outside parties. But what about existing owners of the property? They do not seem to have any recourse under this new law.

Transfer on Death Deed and Medicaid Recovery

Since the TOD deed doesn’t transfer any interests during life, the property remains an asset of the owners. Although this article is not about Medicaid planning, the TOD deed does effect Medicaid recovery.

A residence is an excludable resource for a Community Medicaid applicant so long as a spouse or minor child are also residing there, or if no spouse or minor child, the equity interest does not exceed $1,071,000.00. However, Medicaid can recover the cost of the home care once the house goes through the recipients estate at death (or their spouse). But the TOD deed can thwart Community Medicaid recovery.

New York State is one of less than half the states that restrict Medicaid recovery to those estate assets. Estate assets are those that pass through intestacy or a Will in Surrogate’s Court.  Therefore, a TOD deed bypasses Medicaid recovery just like a trust. A few of the states that similarly restrict Medicaid recovery to estate assets specifically allow recovery through transfer on death deeds. Will this be a turning point that prompts Medicaid to change their policy? We shall see.

Transfer on Death Deed and Creditors 

The statute does not appear to allow creditors to directly attach to the property to satisfy debts. However, to the extent that the transferor’s probate estate is insufficient to satisfy a claim (either creditor or one-third election from spouse or statutory allowance to a surviving child), the estate may enforce the liability against property transferred via TOD deed. This indicates that a TOD deed can be clawed back into the estate to satisfy debts but that creditors cannot directly put liens on the property.

Is a Transfer on Death Deed any Better than Heirship Deed?

Strictly speaking, under Article 19 of the Real Property Law, real estate in New York passes automatically to the designated beneficiaries at the owner’s death. The reason people still go through probate with real estate is to get clear title to sell the property. Otherwise, beneficiaries must wait two years and then transfer or sell the property via a complicated heirship deed that title companies do not generally like. So, yes the TOD deed is an improvement over the heirship deed.

Benefits of Transfer on Death Deeds

The main attraction of a TOD deed is its simplicity and cost-effectiveness. Here’s how it can benefit property owners:

  1. Avoidance of Probate: Unlike property solely governed by a will, property transferred via a TOD deed does not go through the probate process. This means beneficiaries can gain access to the property (or sell it) more quickly after the owner’s death, without the legal costs and delays associated with probate.
  2. Maintains Control: Owners retain complete control over the property during their lifetime. They can sell or encumber the property as they see fit without needing consent from the designated beneficiary (unlike with a life estate where the remaindermen must agree to a sale).
  3. Revocability: The TOD deed is fully revocable. Owners can change their minds at any time prior to their death, offering flexibility if their circumstances or intentions change. Note that if multiple owners drafted a TOD deed, they must all revoke it.
  4. Straightforward Process: Establishing a TOD deed is less complex and costly than setting up a trust. It requires fewer formalities while still allowing owners to specify their beneficiaries directly.

Drawbacks of Transfer on Death Deeds:

Despite the benefits, TOD deeds come with limitations that might make them unsuitable for some estate planning objectives:

  1. Lack of Control Over Succession Details: Once the property transfers, there is no one officially in charge of managing or selling the property. This can lead to potential disputes among beneficiaries regarding the use or sale of the property. Disputes = litigation = $$$$$$$$$$.
  2. Lapsed Rights. The TOD deed is a blunt instrument that does not allow for nuanced succession planning. If the transferor names two or more designated beneficiaries on the TOD deed and one beneficiary predeceases the transferor, then that person’s share is automatically transferred to the other beneficiary. This does not allow for the common per stirpes allocation to the beneficiary’s children.

To Illustrate: Suppose a property owner sets up a TOD deed for their home, designating their three children. If one child predeceases the owner, the provision mandates that the deceased child’s one-third interest is evenly distributed between the surviving two children. Each surviving child would then receive half of the property instead of just one-third. Sure, the death does not create a gap in ownership but what about grandchildren? Grandma just disinherited her grandchildren. Did she mean to do that?

Although the statute does not mention alternate beneficiaries, the statute includes sample language for the deed that does. An alternate can be named, but when you have multiple beneficiaries, as illustrated above, the remaining beneficiaries inherit. Perhaps we can draft a deed that specifically names an alternate for each beneficiary, but the deed would have to be very clear and does contradict the statute!

  1. Cannot Transfer to Minors: When planning with families with young children, a TOD deed will not work since minors cannot own real property (must be by trust for their benefit).
  2. Multiple Owners and Beneficiaries Can Create Confusion. If tenancy-in-common owners transfer their individual interests, they can name their own beneficiaries for their portion of the property. On the surface, this is the same the owners can do under their individual Wills. However, as explained above, the original owner will have no right to bring a partition proceeding if the co-owner dies! The remaining original owner has to deal with those who newly inherited the property with little bargaining power and subject to the right of first refusal.

Conclusion

Despite its advantages, these deeds have certain limitations, and I would not recommend them in every situation. Transfer on Death deeds are a great tool for those who have simple estate plans, as a complement to a Will. When there are multiple beneficiaries (especially if one is living on the property), minors’ inheriting, , or the client has long term care considerations, you’ll need a more comprehensive solution than this deed provides. So, TOD deed I am happy to add you to my estate planning tool chest, but sometimes you just can’t beat a trust.

 

 

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