By Merri Rudd, appeared September 7 and 21, 2006, Albuquerque Journal, Business Outlook
Reprinted with permission

Editor's note: This column may not be quoted or reproduced in whole or part without express written permission of the author.

Q: You wrote a good article about transfer on death deeds (TODDs). However, now I will get a flood of calls from people who want one, and I will attempt to discourage two-thirds of them from executing a TODD. I spend lots of time convincing people that probate is not to be feared, and that probate allows people to decide exactly how their estate will be distributed. You might do a follow-up article on the potential pitfalls of TODDs. Albuquerque Attorney

An attorney whom I greatly respect suggested this topic. So in fairness to readers, the legal community, and title companies, I will address the downsides of TODDs.

First, when a homeowner has more than one child, naming all the children as beneficiaries on a TODD may cause problems. Once the owner dies, the siblings will have to decide whether: 1) to keep the house; 2) to make improvements; 3) to rent it; or, 4) to sell it, for how much, and under what terms. Often parents have several children, some of whom are estranged or in constant conflict with one another. Setting up a TODD in that situation may avoid probate, but will not prevent a family feud. It is a recipe for disaster, conflict, and possible court battles.

Second is the issue of alternate beneficiaries. If an adult child dies and alternative beneficiaries are listed, a whole new set of problems may arise. The will may provide that a grandchild's share of the estate be held in trust until a child is 21 or older and may appoint a trusted friend as trustee of that child's trust.

With a TODD, if the grandchild who receives a share of the real property as an alternate beneficiary is under 18, then 1) the child will receive their interest at age 18 (the age of majority); and 2) the person who goes to court to seek conservatorship to hold that interest until the child reaches 18 may NOT be the person the owner wanted to have that control. For example, the daughter-in-law that the parent never liked could be appointed conservator.

Third, many people insist on preparing their own TODDs rather than hiring a reputable attorney. This could be a mistake. Incorrect legal descriptions, ambiguity in naming the beneficiaries, failure to record the TODD during the owner's lifetime, or other legal issues could invalidate the TODD. If a TODD fails, a court probate procedure would be necessary.

Fourth, a conflict may exist between the owner's will and the TODD. For example, the will may say, "I leave all of my property in equal shares to my three children A, B and C." But the TODD may only name Child A as the beneficiary. The TODD will "trump" the will unless fraud or undue influence is proven in a lengthy court battle. To be on the safe side, the owner's will should reiterate the intention of the TODD in case the TODD is questioned or set aside after death. Having both documents refer to the same beneficiaries can prevent future problems.

Fifth, if a TODD beneficiary dies before the owner and no alternate is named, the transfer lapses and a court probate proceeding will be necessary.

Finally, title companies dislike TODDs. A title company is likely to ignore a TODD that is signed by an attorney-in-fact (i.e., an agent under a power of attorney) who is also a grantee (TODD beneficiary). To avoid this problem, some attorneys have modified their powers of attorney to provide the specific power to an attorney-in-fact to sign a TODD even if the attorney-in-fact is the TODD beneficiary.

Also, title companies are reluctant to insure title to the house during the first year after an owner's death. This is because the deceased owner's creditors can reach TODD property for up to one year after death. Even if title passed via the TODD to the beneficiaries, the assets of the estate may be insufficient to pay claims against the estate and the family and personal property allowances. If so, the TODD transfer is "not effective" to the extent needed to pay those claims.

Postscript: After the above column appeared, a local attorney informed me of another possible "glitch" with Transfer on Death Deeds (TODDs). A title company refused to allow the record owner of a house to sell the house without the written consent of the TODD grantee beneficiary.

Never mind that a grantee beneficiary has no ownership rights in the house until the owner dies. Ignore the law's explicit provision that states, "The signature, consent or agreement of or notice to a grantee beneficiary of a transfer on death deed is not required for any purpose during the lifetime of the record owner." Nor does the TODD law require the grantee beneficiary to sign, consent or agree to any revocation of or change to a TODD. By law the owner has the full power to sell the house and revoke or change a TODD without anyone else's consent.

I suggested that the attorney find another title company that would follow the law. Instead, the client chose to record a written revocation of the TODD prior to the sale. At least the title company did not require the grantee beneficiary to consent to that revocation. After the revocation was recorded, the title company allowed the sale to proceed. But the title company's failure to follow New Mexico's law created unnecessary paperwork, expense and hassle for the record owner and attorney.

Yet another attorney reported a different problem. The TODD is signed on a Friday and the owner/grantor dies the Sunday before the Monday when the TODD is recorded. According to the law, the TODD has no effect if it has not been recorded prior to the owner's death.

If readers still want a TODD after considering these possible downsides, please hire a reputable attorney to make sure the TODD is properly worded and recorded.

© 2006, Merri Rudd & Albuquerque Journal, All Rights Reserved