Transfer on Death (TOD) Deeds: A Guide for the Nonprofit Executive
Eddie : You surprised to see us, Clark?
Clark : Oh, Eddie… If I woke up tomorrow with my head sewn to the carpet, I wouldn’t be more surprised than I am now.
This iconic exchange from National Lampoon’s Christmas Vacation may capture the reaction of a charity’s leadership upon learning that the organization owns a new piece of real estate without ever having known about the transaction. This can happen through a “transfer on death” deed (TOD), which operates like a “pay on death” bank account: the owner dies and, voilà, the new owner takes over. This situation raises a few issues for the responsible executive: Should we take it? What if we don’t want it? Would it be a good idea to start promoting this sort of gift?
While we at CCK can’t help answer these questions in the abstract, here are some of the issues the nonprofit executive absolutely needs to know about transfer on death deeds.
#1 Transfer on Death (TOD) Deeds Are Real and Growing in Popularity
Some form of transfer on death deeds has now been adopted in more than half of the states. There is even a “uniform law” that has been created and suggested for adoption, a sure sign that the TOD is here to stay.
#2 Transfer on Death Deeds Can Be Disclaimed
Reports to the contrary are untrue. However, such a disclaimer must typically be submitted within the time period for disclaiming any other type of inheritance.
CCK TIP: The existence of a transfer on death deed may not become known, even to the personal representative, until after the deadline for disclaimers has passed. In such a case, a charity would need to petition the probate court for leave to file “out of time.”
While such relief would typically be granted, the time and expense required to fix the problem may not be insubstantial.
#3 TODs Are a State Law Issue
Although the state-to-state laws on transfer on death deeds are similar, they are by no means identical. For example, there is an issue in California whether a TOD can even be used to transfer real estate to a charity.
#4 The Property Can Come With Strings
A TOD property comes burdened with all debts, mortgages and other encumbrances. It may be better for a charity to take real estate under a will rather than a transfer on death deed. Testators often direct that all debts be paid out of estate assets. In that case, the charity may well be able to receive the realty free and clear.
#5 Transfer on Death Deeds Are Subject to Abuse.
Transfer on death deeds are often touted as a means to avoid probate. The devices have also been characterized as a “poor man’s trust.” The simplicity and ease of executing a transfer on death deed has made it a dangerous tool in the hands of greedy relatives, friends and advisors.
Put simply, it is easier for a person with bad motives to manipulate an impaired senior citizen into signing a TOD than to create/modify a will. The TOD usually does not require the involvement of multiple people (lawyers, witnesses, etc.).
#6 Transfer on Death Deeds Are Open to Legal Challenges.
Some people equate “avoiding probate” with “smooth sailing.” Not so in this case. A transfer on death deed executed under suspicious circumstances is subject to collateral attack for the same reasons as might give rise to a will contest – diminished capacity, undue influence, etc.
As discussed above, the very simplicity of the TOD may tend to give rise to conditions inviting such a challenge.
#7 A Will Cannot Change a TOD
A valid, recorded TOD will take precedence over a contrary designation in a will, even if the will is executed later.
#8 A Transfer on Death Deed Does Not Trump a Joint Tenancy or a Pre-Mortem Disposition of the Property.
The basic law is this: A TOD has no legal effect until the donor dies. If the donor sells the real estate prior to death, the TOD is a nullity. If the property is owned in joint tenancy at the time of the donor’s death, the survivor, and not the charity, succeeds to the decedent’s interest.
#9 There May Be a De Facto Waiting Period Before the Sale of a TOD Property.
A transfer on death deed is a “weak” deed, much like a quitclaim deed. This means that it does not assure the new owner that the property is free of liens and other encumbrances. Until that can be investigated and until the time for asserting claims has passed, title insurance companies will be unwilling to issue a standard policy. The subsequent purchasers (almost always home-buyers) will not be able to obtain mortgage financing without such insurance.
CCK Tips to Gift Planners Dealing with TOD Donors:
- Review the above points before encouraging transfer on death deeds.
- If a donor informs you that there is a TOD in your charity’s name:
- Try to ascertain that the document has been prepared correctly and names your organization with precision;
- Make sure that the document has been filed with the appropriate land records office (in most states, must be done within 60 days of execution of TOD);
- Obtain current deed on property to check for joint ownership; and
- Investigate any liens or other encumbrances on the property.
- Using the information gained, make a preliminary decision whether your organization will accept or reject the gift at donor’s death.
- Conversely, if a donor informs a charity that it will take real estate under a will or a testamentary trust, the gift planner should arrange to check the relevant land records JUST IN CASE a TOD has been recorded. If so, the donor should be informed so that (s)he can take measures to ensure that the desired donee receives the property.