Many clients ask, “How do I keep my house from going into probate when I die?” A Transfer on Death Deed (“TODD”) is one way to do this.
What is a TODD? In 2015, Texas enacted Chapter 114 of the Texas Estates Code, which created and authorized the TODD. Its main purpose is to allow a property owner, whose main asset is their home, to transfer their interest in the property to a designated beneficiary/beneficiaries, outside of the probate process. The original statute even provided a statutory form that could be used by property owners and attorneys.
What are the advantages? First, the TODD allows the owner to transfer title by simply recording the TODD before the owner passes away. Second, a TODD (like a will or trust) does not trigger any mortgage “due on sale” clause, and it does not affect any homestead or ad valorem exemptions. Third, the TODD can be revoked at any time during the lifetime of the owner. This means that the owner can still sell the property during his lifetime.
What are the disadvantages? The TODD became effective in 2015; however, over the last five years the disadvantages are becoming more and more evident.
First, the statutory form, which was intended to make drafting a TODD easier, has been dropped from the 2019 statutory version, because the poorly written form created more confusion and problems than intended.
Second, the statute provides for a two year “claw back” period which allows unpaid creditors to “claw back” the deceased owner’s property into the probate estate and force a sale in order to pay the creditors.
Third, title companies may refuse to write insurance policies for the property during the two year “claw back” period. This results in many beneficiaries being unable to sell or refinance the property during the first two years.
Fourth, the TODD overrides any contrary provision in the owner’s Will, even if the Will is signed after the TODD. The only way to revoke a TODD is by either expressly revoking the TODD, or by revoking the prior TODD and naming a new beneficiary. The revocation is not effective until the instrument is filed the in the county clerk’s office where the property is located
Fifth, the beneficiary takes the property, subject to all conveyances, encumbrances, assignments, contracts, mortgages, and liens. In some instances, this can lead to a beneficiary not being able to pay off the lien obligations and forcing either a sale of the property, if possible, or a foreclosure.
Do I still need a Will? There are several advantages to a TODD, but a property owner needs to be aware of the disadvantages when deciding whether to use one. A TODD can be an easy way to transfer property to a beneficiary but it should be considered as one tool in the toolbox. It is often necessary to support that planning with a well written Will to complete your planning. Be sure to speak with your attorney to identify the best planning options for your circumstances.