By Ronald Fatoullah and Stacey Meshnick
Transfer on Death deeds are not ‘dead on arrival’ and they do serve a purpose, but for most individuals, these deeds clearly are not the best way to transfer a home to the next generation.
As of July 19, 2024, New York State allows Transfer on Death (TOD) deeds. According to NY’s Real Property Law, owners (transferors) can sign a deed designating beneficiaries to inherit property on death without the need for probating a Last Will and Testament.
The law sets forth several requirements, including a form for the TOD deed. The deed must include the transferor and beneficiaries’ names and addresses, as well as the property description. In order to complete the deed, you must have two witnesses and a notary present. Further, in order to execute the deed, you must have the same capacity as is required to execute a Will, which is a higher form of capacity than that necessary to sign a contract or a trust. The law also enumerates ways to revoke the deed, either through a revocation document or the execution of a new TOD deed.
This TOD deed transfer is different from transferring property to a Revocable Trust. The TOD transfer does not take place until the transferor/owner dies. In addition, this deed can only grant equal percentage interests and tenancy in common (as opposed to joint tenancy with right of survivorship) interests. Therefore, for example, if one of the beneficiaries passes away, his/her interest lapses upon death. In other words, the deed will no longer control how that interest is distributed. This alone is a huge deficit of the TOD deed.
On the contrary, the Grantor of a revocable trust can leave property in whatever percentages and whatever interests he or she wishes. In other words, while a TOD deed can leave 50% to person A and 50% to person B as tenants in common, a Trust can name Person A as 50% beneficiary and Person B as 50% beneficiary, as joint tenants with rights of survivorship, so that if Person B dies, his/her 50% will be distributed automatically to Person A. A TOD deed severely limits viable transfer options of the transferor.
Another advantage of a revocable trust is that trust language can be specific about what is to happen to those residing in the home (whether they are beneficiaries or not) upon the death of the Grantor. Without such language, title companies may have issues with insuring a property that was transferred by a TOD Deed in which some beneficiaries are residing.
Further, most of our clients seek our advice for long-term care/Medicaid planning. The TOD deed will not provide Medicaid protection for the home that most seniors need. A Medicaid Asset Protection Trust (“MAPT”) remains the gold standard for transferring a primary residence to an individual’s beneficiaries while removing the home from the transferor’s name for Medicaid purposes. With a MAPT, tax benefits such as a basis step up are also preserved.
For these reasons, a Medicaid Asset Protection Trust or a revocable trust are much better ways to transfer your home. In addition, title companies have already raised several concerns about the use of TOD. While TOD deeds serve a purpose in certain circumstances, these deeds are limiting, are not flexible and will not provide the long-term care asset protection that most individuals need.
This blog posting is for informational and educational purposes only. It is general in nature and not person or circumstance specific. This blog posting is not intended nor should it be construed as rendering independent investment, legal or tax advice. It may but does not necessarily constitute attorney advertising.