The New NY Transfer on Death Deed – Everything You Need to Know

As of July 19, 2024, New York State adopted legislation recognizing Transfer on Death (TOD) deeds, allowing owners to transfer property upon their death without the need for probate. This new TOD deed provides a straightforward process for estate planning while ensuring that real property transfers smoothly to one or more beneficiaries.

What Is a Transfer on Death Deed?

A Transfer on Death (TOD) deed is a legal instrument that allows property owners to designate one or more beneficiaries who will inherit real property directly upon the transferor’s death, bypassing the probate process.

Unlike property solely governed by a will, a recorded TOD deed allows for an automatic transfer without the associated legal costs of probate. This means beneficiaries can gain access to the property more quickly, without court intervention or the delays of probate proceedings.

Additionally, since the property remains under the owner’s full control during their lifetime, they may revoke or modify the TOD deed as needed, ensuring flexibility in estate planning.

The deed must comply with statutory allowance provisions, including execution before a notary public and proper recording in the county clerk’s office where the property is located.

Failure to follow these requirements could result in the property being subject to the transferor’s probate estate, leading to potential disputes among heirs or legal complications.

Key Features of New York’s TOD Deed Law

The New York Real Property Transfer on Death Act, codified under Section 424 of the New York Real Property Law, outlines specific requirements and features for TOD deeds:

Execution Requirements

The TOD deed must be signed by the property owner in the presence of two witnesses and acknowledged before a notary public. The legal description of the property must be included in the deed to ensure accurate identification. Any errors in execution may result in the deed being deemed invalid, requiring corrective action or probate intervention.

Recording

To be valid, the TOD deed must be recorded in the county clerk’s office where the property is located before the owner’s death. The recorded deed ensures that the transferor’s probate estate is bypassed, allowing for a direct transfer to the designated beneficiary. Failure to record the deed in the appropriate county where the property is located may result in legal complications, requiring court intervention to validate the transfer.

Revocability

Owners retain complete control over the property during their lifetime and can revoke the TOD deed at any time before their death. This revocation must be formally recorded in the county clerk’s office to be legally effective. Unlike joint tenancy or life estate deeds, a TOD deed allows the owner to maintain complete ownership rights without requiring consent from beneficiaries or co-owners.

Beneficiary’s Interest

The designated beneficiary has no ownership rights until the owner’s death, preventing issues such as creditor claims or Medicaid recovery against estate assets during the owner’s lifetime. If the beneficiary predeceases the owner, the property remains part of the owner’s estate unless an alternate beneficiary is named. It is also critical to ensure that multiple beneficiaries are clearly specified to avoid potential disputes and succession details that could complicate the transfer process.

Pros of Using a TOD Deed in New York

Implementing a TOD deed in New York offers several advantages:

Avoidance of Probate

Transfer on death TOD deeds allow real property to be automatically transferred to the designated beneficiary upon the owner’s death, eliminating the time-consuming and costly probate process. Unlike traditional wills, which must go through probate court, a recorded TOD deed ensures that ownership is seamlessly transferred without court intervention. This allows beneficiaries to gain access to the property more quickly, reducing administrative burdens and legal fees associated with probate.

Retention of Control

Owners retain complete control over their property during their lifetime, allowing them to sell, refinance, mortgage, or modify the TOD deed at any time without needing consent from the designated beneficiary. This ensures that the owner is not locked into an arrangement that may become unfavorable over time. Unlike a life estate deed, where the beneficiary gains certain rights before the owner’s death, a TOD deed allows the owner to maintain sole decision-making power until their passing.

Simplicity and Cost-Effectiveness

A TOD deed is a straightforward process that requires fewer formalities than setting up a trust, making it a cost-effective estate planning tool. Unlike revocable living trusts, which require ongoing management and funding, a TOD deed simply needs to be signed, notarized, and recorded with the county clerk’s office. This minimizes legal costs and administrative complexity while still ensuring that the property is efficiently transferred upon the owner’s death.

Protection from Medicaid Estate Recovery

Because real property transferred through a TOD deed bypasses probate, it may not be subject to Medicaid estate recovery, which can occur if a deceased individual’s estate is used to reimburse Medicaid benefits. This means that the property could be preserved for the designated beneficiary rather than being claimed by the state for outstanding Medicaid expenses. However, it is important to incorporate Medicaid planning strategies to ensure full protection against potential recovery claims.

Capital Gains Tax and Step-Up in Basis

A significant financial advantage of using a TOD deed is that it allows beneficiaries to receive a “step-up” in tax basis upon inheriting the property. This means that the property’s value is adjusted to its fair market value at the time of the owner’s death, which can significantly reduce capital gains taxes if the beneficiary later sells the property. Unlike joint tenancy, where capital gains taxes can apply to half of the inherited property, TOD deeds provide a full step-up in basis, offering greater tax efficiency for heirs.

Cons and Considerations

While TOD deeds offer notable benefits, it’s essential to consider potential drawbacks:

Creditor Claims

Property subject to a TOD deed may still be liable for creditor claims after the owner’s death. If outstanding debts exist, creditors may attempt to collect from the estate, potentially reducing the beneficiary’s inheritance. It is essential to review any liabilities tied to the property before executing a TOD deed to minimize unexpected financial burdens.

Impact on Medicaid Eligibility

While a TOD deed itself doesn’t affect Medicaid eligibility, Medicaid planning should be considered to avoid complications for the beneficiary. Transferring property upon death may impact a beneficiary’s financial standing, potentially disqualifying them from certain benefits or subjecting them to Medicaid estate recovery.

Potential for Disputes

If multiple beneficiaries are named, succession details must be clear to prevent potential disputes among heirs. Property division among multiple beneficiaries can be complex, particularly if the property needs to be sold to distribute shares equitably. Proper legal guidance can help minimize conflicts and ensure a smooth transfer.

Execution Formalities

Failure to follow statutory allowance and execution formalities, such as proper recording in the county clerk’s office, can render a TOD deed invalid. Property owners should work with experienced estate planning attorneys to ensure all procedural requirements are met.

Estate Tax Implications

A TOD deed does not remove real property from the owner’s taxable estate, which means estate assets may still be subject to estate taxes if thresholds are exceeded. It is important to evaluate whether alternative estate planning strategies could reduce potential tax liabilities.

Restrictions on Beneficiaries

New York law requires that all designated beneficiaries inherit equal shares of the same property. This can create challenges when multiple beneficiaries have differing individual interests or when the property needs to be managed collectively.

Minor Beneficiaries

If a TOD beneficiary is a minor, they may not gain access to the property until reaching the age of majority, requiring additional legal arrangements such as a trust to manage the asset.

Joint Ownership Complexities

For properties with multiple owners, all joint owners must agree to execute or revoke a TOD deed, which can complicate changes. If one joint owner disagrees with a proposed transfer, additional legal proceedings may be necessary.

Alternatives to Transfer on Death Deeds

Depending on individual circumstances, other estate planning tools may be more appropriate:

Revocable Living Trusts

These allow for nuanced succession planning, ensuring beneficiaries directly receive property without probate while allowing for more flexible terms. A revocable living trust also provides asset protection, reduces estate taxes, and allows for detailed control over how and when beneficiaries receive their inheritance. Unlike a TOD deed, a trust can provide oversight for minor or special needs beneficiaries.

Joint Ownership with Right of Survivorship

A surviving owner automatically inherits the property, bypassing probate. However, joint tenancy carries legal risks and potential tax implications. If a co-owner has debt or legal issues, creditors may place liens on the property. Additionally, all co-owners must agree to sell or refinance, which can create complications if disputes arise.

Life Estate Deeds

A life estate deed allows the owner to transfer property while retaining use of it during their lifetime. However, it limits the owner’s ability to sell or mortgage the property without the consent of the remainder beneficiary. Life estates may also create Medicaid eligibility concerns, as the retained life interest can be counted as an asset for Medicaid planning purposes.

Testamentary Trusts

A testamentary trust is created through a will and only goes into effect upon the testator’s death. It allows for structured distribution of assets and provides safeguards for minor beneficiaries or individuals with disabilities. Unlike a TOD deed, a testamentary trust ensures a level of control over how assets are used after the owner’s passing.

Should You Use a Transfer on Death Deed?

The decision to use a TOD deed depends on your estate planning objectives and the complexity of your assets. Unlike a traditional will, a TOD deed allows for a more direct property transfer. However, it may not be suitable if complex beneficiary arrangements, legal description concerns, or Medicaid planning issues arise.

Instances Where Transfer on Death Deeds Might Be a Good Option

A Transfer on Death Deed (TOD deed) may be an advantageous estate planning tool in several situations:

• Simplifying Estate Transfers – For property owners who want to pass real property to a designated beneficiary without the complexity of probate, a TOD deed provides a streamlined alternative.
• Avoiding Probate Costs and Delays – If the goal is to avoid the expense and time of probate, a TOD deed ensures that the property is automatically transferred upon the owner’s death.
• Retaining Full Control During Life – Unlike joint tenancy, where co-owners share control, a TOD deed allows the property owner to retain full rights over the property, including the ability to sell, refinance, or change the beneficiary at any time.
• Providing for a Single Beneficiary – When leaving property to a sole heir, a TOD deed is an efficient way to ensure a smooth transfer without needing a trust.
• Managing Small Estates – If the estate does not require a complex estate plan or trust, a TOD deed is an affordable option to transfer ownership.

Instances Where Transfer on Death Deeds Are Not a Good Option

While a TOD deed is useful in many cases, it may not be the best option in the following circumstances:

• Multiple Beneficiaries with Different Interests – If multiple beneficiaries are inheriting the same property, disputes may arise regarding its management or sale.
• Medicaid Planning Considerations – Property transferred via a TOD deed may still be considered part of the transferor’s estate for Medicaid recovery, potentially affecting the financial standing of heirs.
• Estate Tax Implications – If the estate is large and subject to federal or state estate taxes, other planning tools like irrevocable trusts may be more beneficial.
• Minor Beneficiaries or Special Needs Heirs – A TOD deed does not provide mechanisms for managing property for minors or individuals with special needs, making a trust a better alternative.
• Creditor Concerns – Since the property passes directly to the beneficiary, it may be vulnerable to their creditors or legal claims.
• Co-Owned Property Without Joint Agreement – If the property is owned by multiple people, all co-owners must consent to a TOD deed, which can complicate the process.

Is a TOD Deed Right for You?

While TOD deeds offer a simplified way to transfer property, they are not suitable for everyone. Those with complex estate planning goals, such as unequal distribution of assets or protecting property from creditors, may benefit from alternative options such as living trusts. Consulting with an experienced estate planning attorney in New York can help determine the best approach for your unique needs.

If you’re considering a TOD deed or exploring other estate planning strategies, Zeus Estate Planning is here to help. Contact us today to discuss your options and ensure your assets are protected according to your wishes.