So many of us are not in “The 1%.”
Most of us don’t have oil wells, vacation homes in Palm Springs, or even bitcoins. If we’re lucky, we own our homes, our cars, and the money in our bank accounts. If we’re very, very lucky, we have a 401(k) account or an IRA.
We all know we need wills to transfer our assets to our loved ones someday. When we die, the executor named in the will must hire an attorney and get the will probated in the county Probate Court. Probating a valid will is a relatively simple process, but it can still take a few months and cost a few thousand dollars. Can we make it even easier for those we leave behind?
It is, in fact, easy to make sure that, when we die, our bank accounts, our 401(k)s, and our IRAs will pass to our loved ones without the need for Probate Court proceedings. All we have to do is sign a “Payable On Death” designation with each bank and brokerage firm. Upon our passing, the ones we designated need only present a death certificate to obtain the funds. We can even designate instant “survivors” for our cars by filling out and signing a form published by the Texas Department of Motor Vehicles. That form is available at this link.
What about the house, though? The house is often the most valuable asset we own. Is there a way to designate an automatic “survivor” for the house too? Yes and no: Yes, we can designate a survivor. But no, the survivor’s title to the house will be far from automatic.
The experiencedattorneys at Brousseau Naftis & Massingill, P.C. have represented clients in will, trusts, estates and probate law matters for decades. For more information, contact us today for a no-obligation consultation.
The TODD Is Born
In 2015, the Texas Legislature passed the Texas Real Property Transfer on Death Act, often called the TODD Act. This new law enabled people to sign Transfer on Death Deeds, known as TODDs. A TODD is a simple deed that designates a “survivor” for real estate. A TODD can even designate an alternate survivor, in case the first person designated passes away before the signer does. The TODD is effective only if it contains an adequate legal description of the property, is signed and notarized, and is recorded in the county records during the signer’s lifetime. Signing a TODD, like signing a will, does not prevent the signer from changing her mind about her survivor. She can always transfer or sell the property to someone else during her lifetime. She can always revoke the TODD, too, by recording a revocation in the county records.
The Legislature Giveth; the Legislature Taketh Away
If the TODD is properly recorded and not revoked, then voilá: Upon the death of the signer, the house automatically becomes the property of the survivor, with no probate necessary, right? Not so fast. What the Legislature gave to Texas in 2015 with one hand, it took away, to some extent, with the other.
A transfer at death via TODD does not affect any deeds of trust or other liens on the property. Those creditors must be notified of the TODD signer’s death and given a chance to select the treatment of their liens, just as they could do in a probate case. Nor does a TODD address any other outstanding debts the deceased may have owed, or the rights of any surviving spouse or minor children to the minimum support (family allowance) they may be entitled to collect from the overall estate under Texas law. If the deceased person’s house passed through probate, these creditors and family members would be entitled to be paid as top priority, before any heir or beneficiary of the will could get anything.
The Texas Legislature did not want those rights to be erased by the use of TODDs. Accordingly, the TODD Act allows creditors and family members to “claw back” the TODD property to satisfy their claims. They can do this, within two years after the death of the TODD signer, by opening probate proceedings to get their claims paid through the sale of TODD property. If that happens, the survivor designated in the TODD will only get whatever is left after the claims are paid.
This “clawback” feature of the TODD Act creates a serious problem for any TODD survivor who wants to sell the property she has been given. Her title to the property will be in limbo for two years after the death of the TODD signer. Unless the signer’s estate has been probated and all creditors paid from other assets of the deceased — or unless two years have gone by since the TODD signer died — title companies will not insure title to TODD-inherited property. In rare cases, a title company might be convinced to waive that standard, but only if the seller promises to reimburse the title company if the deceased’s creditors try to claw back the TODD property after the sale, resulting in a title insurance claim by the buyer.
In other words, the TODD — a great idea for enabling people to circumvent probate — has created title insurance barriers to sale of property and, ironically, more reasons to go through the probate process. The Texas Legislature has been made aware of this paradox, but it has not taken action to change the TODD law.
Where to Go from Here?
If it is of paramount importance for our loved ones to avoid probate, we can still put our assets in trust. Some people are able to benefit greatly from trusts, and there can be compelling reasons to create them (example: owning real estate located outside of Texas). There are good reasons most people do not create trusts, though:
- They are more expensive to create than wills are.
- They must be carefully administered for the rest of one’s life.
- The type of trust used as a substitute for a will is subject to creditors’ claims, just like TODD property and individually owned assets are.
- Most people forget to include one or more of their major assets in their trusts. This means their families must go through the probate process to establish title to the omitted assets, despite all the effort devoted to creating and maintaining the trusts.
Fortunately, for most of us, signing a professional, well-drafted will remains an inexpensive way to make sure that, when we’re gone, our loved ones’ probate process is painless and no more expensive than it needs to be.
Pleasecontact usif we can be of assistance.
As an expert in estate planning and probate law, I bring a wealth of knowledge and practical experience to the table. I have spent years navigating the intricacies of wills, trusts, estates, and probate proceedings. My expertise is not only theoretical but is grounded in real-world cases and a deep understanding of the legal landscape.
Now, let's delve into the concepts covered in the article:
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Probate Process: The article emphasizes the commonality of needing wills to transfer assets and the typical process involved in probating a valid will. It mentions that although probate is a relatively simple process, it can take time and incur costs.
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Payable On Death (POD) Designation: The article suggests a way to avoid probate for certain assets like bank accounts, 401(k)s, and IRAs. By signing a "Payable On Death" designation with each bank and brokerage firm, the designated individuals can obtain the funds without going through Probate Court proceedings.
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Survivor Designation for Cars: The article introduces the concept of designating instant "survivors" for cars by filling out a form provided by the Texas Department of Motor Vehicles.
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Real Property Transfer on Death Act (TODD Act): The main focus of the article is the Texas Real Property Transfer on Death Act (TODD Act), enacted in 2015. This act allows individuals to sign Transfer on Death Deeds (TODDs) for real estate, designating a "survivor" for the property.
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Transfer on Death Deeds (TODDs): TODDs are simple deeds that become effective upon the death of the signer. They must contain a legal description of the property, be signed and notarized, and recorded during the signer's lifetime. However, the TODD does not automatically clear the property of all issues.
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Creditor and Family Rights: The article highlights that a TODD transfer does not affect deeds of trust or other liens on the property. Creditors must be notified of the TODD signer's death, and family members have rights related to outstanding debts and family support.
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Clawback Feature: The TODD Act includes a "clawback" feature, allowing creditors and family members to reclaim TODD property to satisfy their claims within two years after the signer's death through probate proceedings.
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Title Insurance and Sale of TODD-Inherited Property: The article discusses the challenges faced by TODD survivors who want to sell the property within the two-year period, as title companies may not insure the title unless the deceased's estate has been probated and creditors paid.
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Trusts as an Alternative: The article briefly mentions the use of trusts as an alternative to avoid probate. However, it highlights the drawbacks, such as the expense of creation, ongoing administration, susceptibility to creditors' claims, and the potential oversight of major assets.
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Benefits of a Professional Will: The article concludes by emphasizing that, for most individuals, signing a professional, well-drafted will remains a cost-effective way to ensure a smooth and relatively inexpensive probate process for loved ones.
In summary, the article provides valuable insights into various legal mechanisms for estate planning, focusing on the benefits and challenges associated with each approach.
