Coronavirus Pandemic Increasing Visits With Lawyers? Will Substitutes Are Worth A Look

By Julie Jason , originally posted on Forbes.com:

Meet the TOD Deed: Will Substitutes That Transfer Real Estate To Heirs Outside Of Probate 

Anecdotally, it seems that lawyers are seeing a flurry of estate planning activity due to the Coronavirus.

One of the misconceptions people have is that their wills control all of their assets, that everything they own passes through the will in the probate process. 

That is not the case. 

Will Substitutes

Wills pass property held in the decedent’s name; “will substitutes” also come into play. Here are some examples: IRA beneficiary designations, joint accounts with rights of survivorship, and transfer-on-death (TOD) bank accounts, all pass assets outside of your will.

For example, if you have an IRA, you file a beneficiary designation with your IRA custodian. If you name your son as your beneficiary, your son inherits your IRA; your will doesn’t come into play. If there is no beneficiary designation, the IRA custodian agreement controls who inherits your IRA (which is a good reason to make sure you read the custodian agreement’s default provisions).

TOD Deeds For Real Estate

Let’s focus on real estate, since a home often can be one of the largest assets one owns. 

It turns out that some, not all, states allow homes to pass to beneficiaries through will substitutes called TOD deeds.

TOD deed laws act much like the TOD laws that permit bank accounts, securities accounts and even cars to be registered in TOD form. However, since a house might have a mortgage or lien attached to it, there is a little more involved. For example, in a current proposed TOD deed law being considered in my home state of Connecticut, there is a provision that deals with exactly that. The beneficiary “takes the property subject to all conveyances, encumbrances, assignments, contracts, mortgages, liens and other interests to which the property is subject at the transferor's death.” 

Purpose Of TOD Deeds

The purpose of a TOD deed is to effect “the transfer of property to an heir after the decedent’s death without the often burdensome, costly and delayed probate process,” said Ben Orzeske, chief counsel at the Uniform Law Commission (ULC). 

The ULC drafts and promotes the enactment of uniform laws that are designed to solve problems common to the states. TOD deeds are covered in the ULC’s 2009 model act called the Uniform Real Property Transfer on Death Act. 

Before adopting the model act, the ULC considered myriad factors that could trigger unintended consequences, such as the capacity of the donor, the effect of other recorded documents, multiple owners, grounds for contesting transfers, the effect of co-ownership with rights of survivorship, delivery, recording of the deed, revocation, the rights of beneficiaries during the donor’s lifetime, the incapacity of beneficiaries, disclaimers, probate protections for omitted spouses and the spouse’s elective share, Medicaid eligibility and the like. 

While TOD deeds are not for everyone, they “help many people, especially those whose major asset is real property,” explained Katie Robinson, legislative program director for the ULC. 

States That Have TOD Deeds

After the ULC approved the model act in 2009, Nevada (2011), New Mexico (2013) and Montana (2019) updated their TOD laws, and a number of other states adopted the model act. They are Hawaii (2011), Illinois (2011), North Dakota (2011), Oregon (2011), Nebraska (2012), District of Columbia (2013), Virginia (2013), Alaska (2014), South Dakota (2014), Washington (2014), West Virginia (2014), Texas (2015), Maine (2018), Utah (2018) and the U.S. Virgin Islands (2019). 

Four additional states introduced bills in 2020 based on the model act: Connecticut, Iowa, Mississippi and Rhode Island. You can link to Connecticut’s bill here. If you live in one of these states, contact your state legislator to voice your views on whether you would like to be able to title your house in TOD form.

Before The Model Act

Other states that have TOD deeds adopted them before the model act: Missouri (1989), Kansas (1997), Ohio (2000), New Mexico (2001), Arizona (2002), Nevada (2003), Colorado (2004), Arkansas (2005), Wisconsin (2006), Montana (2007), Oklahoma (2008), Minnesota (2008), and Indiana (2009). 

The majority of states now have TOD deeds (see table below; URPTODA refers to ULC’s model act). 

Support For TOD Deeds

Are TOD deeds beneficial to everyone who owns a house? Of course not. There is no question that any estate that is more “complex” needs the special care and attention of an attorney who will create a bespoke estate plan. Complexity could be multiple marriages, properties in multiple states, ownership of business interests, patents, trademarks, royalties, gifting, and estates that are subject to state or federal estate taxes.

In addition, the motivation for using TODs cannot be solely to avoid probate. In some states, for example, even though a probate court does not “effect” the transfer of will substitute assets, the court may need to get involved (for example, claims or liens against a home).

However, in certain cases, especially with smaller estates, a TOD deed could be a very good and efficient option.

Attorney Ernest N. Abate of Abate and Abate LLC of Stamford, Connecticut, offered this perspective: “People spend a lot of money creating revocable trusts in many cases just to avoid probate as to any real estate they may own at the time of death. With payee-on-death and transferee-on-death designations, people can get most of their assets to pass without probate, but when there is no TOD provision for real estate they often either put title in joint names with their children, which is not desirable because they lose control in that case, or they put title into a revocable trust.” That would be avoided with a TOD deed, he explained.

Should You “TOD”?  

If you already paid a visit to your estate planner due to the coronavirus or are planning to do so, review how your assets are titled. If you live in a TOD deed state, is there any benefit to you to retitle your real estate in TOD form? What about your other assets? Always involved your estate planning attorney before taking ANY actions about changing any of your holdings. You don’t want to undo a well-laid-out plan.

To read Julie Jason's books, go to https://juliejason.com/books/julies-books.