Article the Transfer on Death (tod) Deed: Utah's New Real Property Transfer Mechanism
| Publication year | 2018 |
| Pages | 30 |
| Citation | Vol. 31 No. 5 Pg. 30 |
September, 2018
Rustin Diehl
FRAMEWORK, PRACTICALITIES, AND PITFALLS
Utah estate planning practitioners, real property practitioners, and business practitioners must consider the now available nontestamentary transfer on death (TOD) deed, a nonprobate transfer mechanism for real property transfers to designated beneficiaries. Previously, nonprobate transfers of real property could only be effected in Utah by funding the real estate to trust, by funding the real estate to other entities, or by unrecorded deed.
During the 2018 General Session, the Utah State Legislature passed H.B. 94, the Uniform Real Properly Transfer on Death Act, embodied in Utah Code sections 75-6-401 to -419. The act is designed to provide a will substitute, similar to other beneficiary designation instruments, which allows an owner of real property to designate one or more beneficiaries who will automatically, and without probate, receive the property effective at the owner's death. Id. § 75-6-405. A TOD deed has retroactive effect, applying to any deed made before, on, or after May 8, 2018.
The Uniform Real Property Transfer on Death Act was enacted in fourteen jurisdictions prior to 2018 and was enacted in six additional states during 2018. NCCUSL Real Property Transfer on Death Act Enactment Status Map, available at http://www.uniformlaws.org/Act.aspx?title=Real%20 Property%20Transfer%20on%20Death%20Act. Several other states also have non-uniform statutes for transfer of death deeds or different types of beneficiary deeds. The uniform act passed in Utah only after three attempts to reconcile concerns from attorneys, title companies, and recorders.
Attorneys who consider using a TOD deed as an estate planning tool should be familiar with (1) the rationale behind TOD deeds, (2) creation and revocation requirements, (3) limits and cautions in using TOD deeds, and (4) best practices in using TOD deeds. This article covers the first two of these and introduces a matrix of select issues; a subsequent article will cover the limits of, cautions for, and best practices with TOD deeds.
Rationale Behind the Transfer on Death Deed
TOD deeds mark an entirely new way for Utahns to transfer real property upon their death. Previously, Utah real property titled in the name of a decedent without a joint tenant required probate in order to convey the decedent's interest - even if the decedent made a bequest of the real property under a last will and testament. Id. § 75-3-102. Although Utah's probate process is simple in comparison to many jurisdictions, most people prefer to stay out of court to avoid potential conflicts, prevent delays, and maintain privacy. To get around Utah's probate requirement, many practitioners assisting real property owners counsel clients to transfer their real property into trusts because trusts do not require court authorization or probate in order to convey real property to a new owner. Id. § 75-7-813. Some unwary property owners use deeds as remedies to avoid probate and avoid hiring an attorney to form a trust.
In one such strategy, a property owner executes a notarized deed in favor of a loved one, often their spouse or children. The property owner does not record the deed, instead leaving the executed deed unfiled but kept "safe and tight" in a proverbial desk drawer, back pocket, or sugar bowl. Several risks make an unfiled, desk drawer deed a less-than-air-tight technique for testamentary transfer. The worst of these is the negating effect of a subsequently filed deed - and there are many reasons for which intervening deeds could be needed. Any deed could negate the potential effect of the unfiled, desk drawer deed to a loved one. This would make the subsequent recordation of the earlier-executed, but unfiled, deed ineffective under Utah's race-notice deed priority statute. Id. § 57-3-103.
In another deed strategy rife with issues, property owners add a person onto the deed as a joint tenant with rights of survivorship. While this technique can successfully transfer the home while avoiding the probate process, property owners who file joint tenancy inter vivos deeds do so in the face of several serious risks and ongoing tax problems.
The risks of adding a non-spouse joint tenant to a deed include (1) increasing the potential for loss of the real estate at the hands of the joint-owner's creditors, (2) violation of adue-on-sale clause pursuant to a mortgage or trust deed note, (3) frequent failure to file federal gift tax returns, and (4) impairment of the transferees' ability to qualify for federal aid programs such as Medicaid or federal student aid. Potentially more serious, a lifetime gift causes the recipient to lose the benefit under Internal Revenue Code section 1014 of a step-up in basis of property acquired from a decedent, potentially increasing the taxable gains taxes due when the property is eventually sold. 26 U.S.C. § 1015. In summation, adding a non-spouse joint tenant to a property to avoid probate creates risks and typically generates a higher tax burden.
If a TOD deed is filed during the life of the property owner, no probate of the deed is required upon the death of the transferor under many circumstances. Because TOD deeds avoid the aforementioned pitfalls of inter vivos deeds, they are a superior technique for nontestamentary transfer of real property upon death.
At a higher level, TOD deeds can be seen as one part of a greater trend in the U.S. and around the globe for the expansion of self-help procedures in legal matters. This trend is reflected in Uniform Probate Code section 6-101, which promotes enactment of statutes providing an asset-specific mechanism for the nonprobate transfer of land. In many low- or middle-income families, the family home is the most valuable asset. For some of these families, undertaking probate or forming a trust appear complicated and expensive. In these cases, TOD deeds may be an option to avoid probate.
During each of the previous three attempts to enact the Uniform Real Property Transfer on Death Act, various potential issues with the bill were raised. Many of the concerns centered around pitfalls that might cause clouded title or the potential for abuse in execution of the TOD deeds, such as coercion, undue influence, or lack of capacity. Others focused on the complications and issues with the automatic transfer of real property compared to other types of automatic property transfers. Because real property is subject to hens and encumbrances, deeds, and sometimes bespoke documentation, automatic transfers may not occur and it could become necessary to appoint a personal representative in any case.
As additional counterpoint to the rationale of providing simple, self-help legal remedies to low-income families, some practitioners suggest that many property owners will execute TOD deeds to avoid using a lawyer, unknowingly setting themselves up for title marketability problems or beneficiary disputes.
Those who hold the view that professional assistance is best also suggest that TOD deeds are a specious solution to a non-problem. They point out that Utah is already a Uniform Probate Law jurisdiction, so the perceived difficulty of probate here is a polemicized but false perception. Further, Utah law already permits other types of real property transfer techniques that can accomplish the same effect as a TOD deed.
While it remains to be seen how the benefits of TOD deeds or the concerns with these deeds will materialize in Utah over time, practitioners from Oregon and Washington, early-adopting jurisdictions of the TOD deed, have not reported seeing many problems yet. However, use of the TOD deed in estate planning provides a markedly different real property transfer regime and features than were previously available in Utah. Utah could experience a mix of benefits and issues from TOD deeds.
As a beneficial practice in estate planning, TOD deeds could be used to fund revocable trusts. Because TOD deeds survive the recording of creditor interests in real property, they are a safeguard to avoid subsequent trust failure due to an inadvertent defunding of a revocable trust. A common scenario for the inadvertent defunding of revocable trusts happens during remortgage transfers out-of-trust. Additionally, where a non-owner-occupied property is subject to a mortgage, the TOD deed avoids uncertainties in federal statutes concerning due on sale clauses in the mortgage and/or mortgage note because the TOD deed is not effective until recorded. Garn-St. Germain Depository Institutions Act, 12 U.S. Code Ann. § 1701j-3. Utilizing a TOD deeds to fund non-owner-occupied real properties subject to mortgages into trusts or other entities, it is unlikely the bank will exercise the due on sale clause because no transfer is made under the TOD deed until the transferor’s death. Utah Code Ann. § 75-6-413(2). The efficacy of using a TOD deed for delayed but durable trust funding is in trade-off with the advantages of using inter vivos deeds for currently effective trust funding during the disability of the property owner to avoid potential conservatorship.
Creation and Revocation of a TOD Deed
To make a TOD deed, a properly owner need only name beneficiaries on a deed containing the essential required elements of a TOD deed. A property owner can also name an alternate...
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