New York Adopts Transfer on Death ("TOD") Deeds: Valuable Probate Avoidance Tool or Trap for the Unwary?

The main goal of many estate planning clients is to bypass the court system entirely.  This is typically because the judicially supervised probate and estate administration process can be viewed by some as too costly and time consuming.  It is also the arena where will challenges, controversial executor appointments, objections to estate expenditures, and other disagreements among family members can unfold.  

In general, the probate process is only necessary to gain access to those assets owned by a person in his or her individual name and without beneficiary designation.  Life insurance proceeds, retirement benefits, and some bank accounts, for example, often pass outside of probate using a properly executed beneficiary designation on the account itself.  Assets owned jointly with rights of survivorship pass automatically to the surviving owner.

Until recently, New Yorkers wanting to avoid probate for their home or other real property had just a few basic options:

• Own the property jointly with rights of survivorship with a spouse or other person;
   
• Transfer ownership of the property by deed to the intended recipient(s), while reserving the right to remain there for life (life estate);
   
• Transfer ownership of the property by deed to a trust established for the benefit of the intended recipient(s) (typically the children).

This past April, New York added an additional option when it adopted the "Transfer on Death Deed Law," which is set to go into effect on July 19, 2024.

Under the new law, New York property owners can designate one or more beneficiaries who will automatically become the owner(s) of the property when the current owner dies, thereby avoiding the need to go through the probate process for these assets.  The designation is made by using a properly executed transfer on death ("TOD") deed, which (among other requirements) must be properly witnessed, notarized and recorded to be effective.

While the TOD Deed is no doubt a useful tool for clients looking to avoid probate for real property, this should not be a substitute for consulting with an experienced estate planning attorney to determine if this option is the right fit.

Some Unexpected Issues that Can Arise with the Use of a TOD Deed:

• Multiple children and the owner makes a TOD Deed to only one child.  Here, a question can arise over whether the owner truly meant to make the named child the new owner of the property, or whether the true intent and expectation was that the property (or the sale proceeds) would be shared with the named child's siblings.  As the new legal owner of the property, there would be nothing requiring the named child to share with his or her siblings.  Only a will (or other appropriate legal documents) can do that.
   
• Multiple children and the owner makes a TOD Deed to all.  At first this may seem like a solution to the first problem, but what if the children cannot agree on whether to hold or sell the property (or at what price they should sell)?  What if less than all are contributing to the taxes and other carrying costs, or if they are contributing unequally?   If the new owners cannot resolve these issues among themselves, they will be forced to call upon a judge to break the gridlock.  This may ultimately result in a forced sale and almost invariably leads to disharmony among the family members.  Co-ownership of real property is all too often where disagreements among family members arise, and this situation in particular is where the wisdom and discretion of an executor may be valuable.
   
• The named beneficiary predeceases the owner.  The new law states that the designated beneficiary's ownership is contingent on his or her surviving the owner, which may or may not be the owner's wish.  Moreover, if the designated beneficiary passes away while the owner is living, probate may still be required if the owner fails to update his or her planning documents.
   
• The named beneficiary does not want the property.  As we all know, there are costs and other responsibilities that come with being a property owner.  Some people simply cannot afford these costs, while others do not hold property in their personal name due to creditor concerns or other legal issues.  If the designated beneficiary is put in the position of having to formally "disclaim" or refuse ownership of the property, the court may have to get involved nonetheless.

New York's approval of TOD Deeds is an important modernization which now brings us in line with more than 25 other states that have adopted similar laws.  Ultimately, the use of a TOD Deed may prove to be a simple, cost-effective way to avoid probate for certain real property in the appropriate case, but the decision to use it should only be made in consultation with an experienced estate planning attorney.

The New York State Senate, Section 424 Transfer on Death Deed, Legislation, May 31, 2024. 

NYS Open Legislation