A Disaster for Many..

Transfer on death deeds, legal in Texas since 2015, have been heralded as the latest, greatest method for keeping real property out of probate.  The goal behind them is laudable: provide a simple mechanism for transferring ownership of land to a beneficiary when the owner dies, no probate required.

Four years later, how’s that working for us?

Not so good.

Let’s start with the form:  there isn’t one. The original Texas statute included a form for the deed.  The revised 2019 statute dropped it. Turns out the statutory form was poorly written and difficult to understand.

Not a promising introduction for a new concept.

If you are looking for guidance, the statute tells us that a proper TOD deed must contain the essential elements and formalities of a recordable deed (not enumerated, of course), plus some specific language. You can find more about that here.  The statute conspicuously omits any reference to Texas community property law and how it must be addressed to make a TOD deed work for a married couple.

Another big problem:  title companies don’t like TOD deeds.  Most are refusing to even write title insurance for the transferred property for the 2-year period following the owner’s death.   As a result, many beneficiaries who have received property under a TOD deed have been unable to sell or refinance it for the first two years.

That has led to more problems, because beneficiaries of the TOD deed take the property with all of its warts, including all tax liens, mortgages, judgment liens, and liens created by the deceased owner’s divorce obligation to a former spouse.   If the beneficiary can’t make the mortgage payment or pay off the other liens, then that could lead to a foreclosure of the property, leaving beneficiaries with bad credit and no inheritance. Not good.

Equally disagreeable is the two-count  year gotcha, which is the incredibly long time that unpaid creditors have after death of the owner to drag the property back into the probate estate and force its sale.  Just imagine how a beneficiary must feel after living on, and making improvements to, a property for 20 months only to see it snatched back into a probate estate to pay someone else’s creditors.

Then we get to the whole estate planning debacle.   The TOD deed over-rides any contrary provisions in the owner’s will, even a will signed after the TOD deed.  That could frustrate someone’s entire estate plan. It could also lead to some pretty nasty litigation if the beneficiary under the will is different from the beneficiary named in the TOD deed.

Also a problem:  the law concerning TOD deeds is counter-intuitive. For example, a TOD deed can never be signed by an owner’s power of attorney agent, although agents can sign  other types of instruments. Unlike most beneficiary-driven documents, a spousal beneficiary designation is not automatically voided by divorce. A TOD deed is not effective unless it was filed in the deed records before the owner died.

The TOD deed is a good concept.  It just needs work.

Virginia Hammerle is the President of Hammerle Finley Law Firm.   To sign up for the firm newsletter,  email legaltalktexas@hammerle.comEmployment opportunities available.

This article does not constitute legal advice.