Transfer on Death Deeds: Additional Probate Avoidance Planning

    By Philip L. Hatchett, Estate, Trust & Wealth Transfer

    Effective July 1, 2013, the Virginia legislature adopted Virginia Code Sections 64.2-621, et seq. which authorized the creation of transfer-on-death (TOD) deeds. Under the new law, an owner of real property (identified as a “transferor”) may execute a TOD deed which will transfer his or her property to one or more beneficiaries effective at the time of the transferor’s death. The TOD deed does not otherwise affect the tranferor’s rights to the property during his or her lifetime. Additionally, the transfer at death occurs outside of the probate process.

    The “beneficiary” of the TOD deed can be an individual, corporation, business trust, estate, trust, partnership, limited liability company, association, joint venture, public corporation, government or governmental subdivision, agency, or instrumentality, or any other legal or commercial entity.

    In order for the deed to qualify for a non-probate transfer of real estate, the following conditions must be met:

    • The deed must contain the same basic elements and formalities of an inter vivos deed;
    • The deed must state that the transfer to a designated beneficiary will occur at the time of the transferor’s death;
    • The deed must be recorded before the transferor’s death in the land records of the clerk’s office of the circuit court of the jurisdiction where the property is located; and
    • The deed must comply with recordation requirements and be indexed by the clerk of the court under the name of the transferor as grantor.

    A TOD deed is revocable, even if the deed itself or another instrument says otherwise. However, after a TOD is recorded, a revocatory act taken against or on the original or a copy of the recorded TOD deed does not revoke it. It can only be revoked if one of the following instruments are acknowledged by the transferor and recorded before his or her death:

    • A new TOD deed that expressly revokes the preceding one, or any part of it;
    • A new TOD deed that alters the named beneficiary of a prior TOD deed;
    • An instrument of revocation that expressly revokes the prior TOD deed or part of it; or
    • An inter vivos deed that expressly revokes the TOD deed or part of it.

    Furthermore, if the deed was made by more than one transferor, revocation by one transferor does not affect the interest of another transferor. If the transferors are joint owners, however, the TOD deed must be executed by all living joint owners and can only be revoked if all surviving joint owners revoke the deed. The term “joint owner” includes joint tenants with the right of survivorship and tenants by the entirety with the right of survivorship.

    Some other important points to consider:

    • The execution of a TOD deed has no current tax consequences. There is no gift tax owed because there is no completed gift; the designation of a beneficiary remains revocable. Additionally, there is no recordation tax unless the TOD deed was made for consideration.
    • A TOD deed is nontestamentary, however, the level of capacity required to execute the deed is the same level required to execute a will.
    • During the transferor’s lifetime, he or she retains full power and control over the property. The TOD deed does not affect the rights of a secured or unsecured creditor of the transferor, nor does it affect the transferor’s ability to qualify for public assistance.
    • The designated beneficiary and his or her creditors have no interest in the property until the transferor’s death. There also is no requirement to notify the beneficiary when the transferor creates or revokes the deed.
    • At the time of the transferor’s death, the interest in the property is transferred to and vests in the designated beneficiary. The beneficiary takes the property subject to all conveyances, encumbrances, assignments, mortgages, liens, and other interests to which the property is subject at the transferor’s death.
    • If a designated beneficiary does not survive the transferor, the interest lapses.
    • Concurrent interests are transferred in equal and undivided shares with no right of survivorship. If one share lapses or fails, the lapsed share transfers to the other beneficiaries in proportionate shares.
    • A divorce a vinculo matrimonii or an annulment revokes any transfer to a former spouse unless the TOD deed expressly states otherwise.
    • A will may not modify or revoke a TOD deed.
    • After the death of the transferor, property transferred by a TOD deed is subject to the claims of the transferor’s creditors, estate administration costs, expenses of the transferor’s funeral and disposal of remains, and statutory allowances to the transferor’s surviving spouse and children, including the family allowance, the right to exempt property, and the homestead allowance, to the extent that the transferor’s probate estate is not sufficient to satisfy these liabilities. If the transferor has executed more than one TOD deed, the liability is apportioned among the properties in proportion to their net values at the transferor’s death.

    TOD deeds are a useful tool for probate avoidance planning. Of course, complications can arrive after the transferor’s death, such as the named beneficiary having predeceased the transferor with no successor named or a challenge of the effectiveness of the deed due to the transferor’s lack of capacity. Nonetheless, complications such as these may arise in any estate administration. At Kaufman & Canoles, we have found that when used as part of a well-executed estate plan, TOD deeds already have proven to be a worthwhile option for clients under a wide variety of circumstances.

    Philip Hatchett is a former Certified Public Accountant. He has been a member with Kaufman & Canoles since 2000. His family wealth management practice includes estate planning and administration, tax, wealth transfer and business entity formation and financing.

    The contents of this publication are intended for general information only and should not be construed as legal advice or a legal opinion on specific facts and circumstances. Copyright 2024.