Typically, upon passing, real property in New York state could pass to heirs through a few methods:
- Subject to the vagaries of intestacy laws, if the decedent passed without a Will.
- Through the often long and costly probate process as dictated by the decedent’s Will if there was one.
- If a trust (Revocable or Irrevocable) was in place and ownership of the property was transferred to the trust, then as dictated by the trust document.
Effective as of July 19, 2024[i] another method has been added to the list: Transfer On Death (TOD) Deeds. This option is available in a few states and has only recently become available in New York State.
Like adding beneficiaries onto a standard brokerage account, you can now add beneficiaries onto a real property you own to direct who inherits a property on your passing to potentially circumvent the probate process. It can be revoked (even if the designation states that it is irrevocable) and/or updated somewhat more easily and affordably than updating your documents. However, to be effective it needs to be properly done and that includes:
- Completing the appropriate forms to record the deed as a TOD deed.[ii]
- The transferor needs to be at least 18 years of age and of sound mind. [iii]
- The TOD Deed needs to be notarized. [iv]
- In addition, the deed needs two witnesses to sign at the same time. [v]
- The TOD Deed needs to then be recorded with the County Clerk prior to the property owner’s passing. It will not be valid if the property owner has passed prior to the deed being recorded.[vi]
There are certainly some clear advantages to consider when looking at a TOD deed as your method of transferring property upon your passing:
- Probate Avoidance[vii] – By designating a beneficiary(ies), in theory the property can pass directly to the person(s) you have designated as beneficiary(ies) without entering into a potentially time consuming and costly probate process. This may allow the beneficiaries to take ownership and either occupy or sell the property fairly quickly.
- Control & Management [viii]– The impact of a TOD Deed only takes effect after the transferor(s) have passed. For joint in entirety owned properties, this means both owners need to pass. Until that time, the property can be sold, rented, modified or otherwise managed as the owners see fit without the approval of trustees or beneficiaries as you would need with trust-owned properties or life estates.
- Revocability – TOD deeds are entirely revocable even if the original designation states that it is irrevocable[ix]. Appropriate steps need to be taken to revoke the deed to avoid potential conflicts or oversights. Revocations can be done by either recording a new deed which revokes the previous one, by recording a revocation form or creating an inter-vivos deed to transfer the property that expressly revokes the TOD deed. All of these methods need to be recorded with the county clerk’s office to be effective. [x]
- Straightforward – Compared to the complexity of trusts/life estates and the drawn-out process of Wills; a transfer on death designation is fairly straightforward that requires very little involvement from external parties such as attorneys, competing beneficiaries, courts, etc[xi].
However, before you consider implementing a TOD deed in your estate plan be sure to review the disadvantages; primarily that a TOD deed is a blunt instrument. In the world of estate planning as it relates to real property, it is an axe.
- Overly Simple[xii] – a TOD deed allows you to name a beneficiary or beneficiaries to your property, but that is it. You cannot weight ownership, that is to say each beneficiary receives an equal share of the property. There also are no per capita or per stirpes designations. If you have multiple beneficiaries and one beneficiary predeceases you, the property is split equally between the remaining beneficiaries with no consideration given to heirs of the deceased beneficiary.
- Lack of Protection – TOD Deeds pass ownership directly to your desired heirs. Protection from creditors or potential future divorcing spouses of your heirs cannot be layered into a TOD Deed. So, if your situation is more complex or if your heirs may be exposed to these risks, protections available in either Wills or Revocable Trusts may be a better course[xiii].
- No Direction – This pertains specifically to properties with multiple beneficiaries. With each owner owning an equal share of the property with no other direction conflict is likely to result. There will be no direction as to who can occupy/use the property, for how long, in what capacity or under what conditions, and how/when to dispose of the property. Deciding how to manage the property and mediate among the beneficiaries will likely require professional assistance. [xiv]
- Not a Medicaid Tool – While we cannot know for certain until precedent is set, it is not likely that this is an effective Medicaid planning tool. It does not remove the asset from the owner’s possession during life allowing it to impact their ability to access Medicaid assistance. While it circumvents the probate process and may temporarily set the property outside of the reach of the Medicaid Community Recovery, if there are not sufficient assets in the probate estate to meet those costs then it may be clawed back into the probate estate and then subject to recovery.[xv]
- Minors Cannot Inherit – Minors cannot legally own real property on their own. Through careful estate planning, property can be held and managed for minors until they reach their maturity, but a TOD deed is a direct transfer of ownership from transferor to beneficiary[xvi].
At the outset, a TOD Deed may seem an easy and straightforward solution to the easy and cost-efficient transference of real property to heirs. However, complex situations often require complex solutions. TOD Deeds are not a one-size-fits-all solution and may only be appropriate for more straightforward situations. Where there are multiple/layered beneficiaries, a desire for protection, or an interest in exerting more control over the asset, other methods may be more suitable.
The Family Wealth Decisions Group does not provide legal advice; however, we can ask questions and discuss your options prior to your seeking legal advice from an attorney. If you are interested in learning more about estate planning, contact our office. We are happy to help!
[ii]NYS Open Legislation | NYSenate.gov
[iii] ibid
[iv] ibid
[v] ibid
[vi][vi] ibid
[vii] ibid
[viii] ibid
[ix]NYS Open Legislation | NYSenate.gov
[xi]New York Now Allows Transfer on Death Deeds, but Should You Use Them? - New York State Bar Association
[xii]NYS Open Legislation | NYSenate.gov
[xiii]What are the Disadvantages of NY Transfer on Death Deeds? - Experienced Buffalo Lawyers
[xiv]New York Now Allows Transfer on Death Deeds, but Should You Use Them? - New York State Bar Association
[xv]What are the Disadvantages of NY Transfer on Death Deeds? - Experienced Buffalo Lawyers
[xvi] ibid