Wednesday, January 1, 2020
Richard E. Anderson Partner — Anderson Vela LLP
FALL 2019 ISSUE: PROBATE & ESTATE PLANNING
Transfer on Death Deeds offer property owners a method to transfer ownership of property upon death without going through probate. In the article below, Richard E. Anderson explains the benefits of Transfer on Death Deeds. Richard E. Anderson is an attorney at Anderson Vela LLP with more than twenty years of experience in real estate, probate, wills, creditor rights, and civil litigation. He is also the Presiding Judge for the City of The Colony, Texas Municipal Court.
Effective for any transfer of real property made in Texas after September 1, 2015,¹ an owner of real property (land or home) may execute a Transfer on Death Deed (“TODD”). This revocable deed is a simple way to transfer real property to a beneficiary after the death of the transferring owner. It can protect the transferred property from being used by the state to recover for any Medicaid benefits that the transferring owner received. It can also minimize the delay that a real property owner may experience in qualifying for Medicaid benefits because of a property transfer that occurred while the owner was alive.
What is a Transfer on Death Deed (TODD)?
A TODD is a revocable deed that permits an owner of real property to transfer the owner’s real property interest to one or more beneficiaries upon the owner’s death. The transfer occurs without the need to go through probate—which is the involvement of the legal system in the property matters of a person who has died.² Many people seek to avoid probate because it can be lengthy, expensive, and is a public process.³
Under the TODD, while the transferring owner is alive there is no change in ownership because the revocable deed only becomes effective upon the death of the transferring owner.⁴ The recipient does not become the owner of the real property until after the death of the transferring owner. This is very important when it comes to qualifying for Medicaid benefits (more on that below).
How the TODD may help avoid probate.
Once the TODD is properly executed, notarized, and filed with the county where the real property is located, no probate is needed to transfer the real property when the owner dies.⁵ The TODD gives the recipient immediate ownership of the real property when the owner dies. The TODD ends up working like life insurance policies, retirement accounts, mutual funds, stocks, and bank accounts. All of these assets pass from an owner who dies to whomever was named by the owner as a beneficiary (think of the forms you have to complete to name beneficiaries for those types of assets). They all transfer upon the owner’s death without the need for probate. Additionally, just like with those assets, while alive, the owner can change who the recipient will be and because the TODD is revocable and can be un-transferred, the transferring owner can—while alive—sell or mortgage the property.⁶
How the TODD can protect real property assets from Medicaid reimbursement—the Medicaid Estate Recovery Program (“MERP”).
In addition to the benefits described above, the TODD is also an important estate planning and asset protection tool for individuals who own a home and who currently, or may in the future, receive Medicaid benefits.
There has been a significant increase in Medicaid benefits now that the “baby boomer generation” is reaching the age of 55—or retirement age.⁷ From now until 2030, an estimated 10,000 baby boomers each day hit retirement age and begin to collect Social Security benefits.⁸ This includes going on Medicare (here’s a mnemonic to help remember the difference between Medicare and Medicaid: Medicare cares for the old and Medicaid aids the poor. Many of these baby boomers go into nursing homes. Medicare pays for 100 days of nursing home care and then, if an individual qualifies, Medicaid begins to pay for the nursing home care.⁹ However, if Medicaid benefits are used, the state can seek reimbursement for its expense if an individual has assets like real property. So, more and more attorneys in Texas are using the TODD to help clients protect their property from a claim by the State of Texas for Medicaid reimbursement.
The United States government requires that states seek recovery from Medicaid recipients under the Medicaid Estate Recovery Program (“MERP”).¹⁰Under MERP, the State of Texas has the right to force the sale of a deceased person’s home to reimburse the state for funds disbursed for the person’s care unless that person qualifies for an exemption. MERP authorizes the Texas Department of Aging and Disability Services (“DADS”) to make a claim for reimbursement for certain Medicaid benefits for recipients who were 55 years or older at the time of death.¹¹ More specifically, under MERP, the State of Texas can recover the cost of long-term care provided through a nursing home or other assisted living facility or program.¹²
For the purpose of Medicaid reimbursement, the definition of a person’s “estate” differs by state. Fortunately for Medicaid recipients in Texas, the State of Texas currently is not as aggressive as other states when it seeks to recover assets under MERP. This is because recovery is limited to assets that pass through a person’s “probate estate” and in Texas, a “probate estate” is defined as all real property (land, home) and personal property (things) subject to probate. “Non-probate property” is not included.¹³ “Non-probate property” is any property that passes to a beneficiary after a person’s death without the need to open a probate. As described above, it may include life insurance proceeds, stocks, bank accounts, IRAs, and mutual funds. All of these transfer from an owner to a designated beneficiary upon proof of the owner’s death (usually by presenting a death certificate).¹⁴ If a TODD has been set-up for an owner of real property, that property would also benefit from being classified as “non-probate property” and therefore be protected from MERP.
How the TODD can affect the transferring owner’s application for Medicaid benefits—the five-year look back period.
You may be thinking, “Well, I will just convey my home to my children outright now; that way, I will not own it at the time of my death.” But beware of timing, because when it comes time to qualify for Medicaid benefits, there is a five-year “look back period.”¹⁵ When a person applies for Medicaid, DADS looks at any transfers made by the applicant during the last five-year period. If it finds that the applicant transferred property during the “look-back period,” the value of that property is used to create a penalty period, which will delay the applicant’s right to full Medicaid benefits.¹⁶ So, because the TODD property does not transfer after the owner’s death, the five-year look back period will not trigger a delay in access to Medicaid benefits.
Important facts to know about MERP exceptions and waivers.
There are some important facts to know about MERP exceptions and waivers. MERP is not applicable when any of the following circumstances exist:
there is a surviving spouse, or a surviving child under 21 years of age;
there is a surviving child of any age who is blind or totally disabled by Social Security requirements;
there is an unmarried adult child residing continuously in the Medicaid recipient’s homestead for at least one year before the recipient’s death;¹⁷
the value of the estate is $10,000 or less;
the recoverable amount of Medicaid benefits is $3,000 or less; or
the cost of selling the property would be equal to or greater than the property’s value.¹⁸
In addition, if the collection of the MERP claim would result in an undue hardship (defined generally as “an unbearable difficulty”), there is a hardship exemption.¹⁹ However, there is an application process and they are generally difficult to obtain.
Some points of caution with TODDs.
First, caution should be taken if the property owner may have—upon death—an insolvent estate. An insolvent estate means that at the time of death, the person’s debts are greater than the value of the person’s assets. If so, under certain circumstances, a probate court may enter an order cancelling the TODD and ordering that the real property be transferred into the probate estate so the debts can be paid off.²⁰
Second, the TODD is fairly new, enacted in September of 2015, and title companies are still developing processes and procedures relating to such transfers. This means title companies may institute additional requirements in order to issue title insurance.²¹ Why is title insurance important? Because in most cases, lenders will not issue mortgages without title insurance on the affected property.
Third, and maybe most important, as the use of TODDs becomes more widespread, the State of Texas may become more aggressive in its estate recovery efforts in the future by redefining the definition of an “estate” under MERP, which could then change the classifications of assets that are subject to the probate process, and subsequently make TODD property subject to it.
While a TODD is great, a will is still a must.
The TODD should not completely replace a last will and testament. Regardless if one chooses to go with a TODD to transfer real property, executing a last will and testament is a must and should be thought of as a “belt and suspenders” approach. A will can provide for other important matters, such as the creation of trusts for minors or those with disabilities, and there also may be a need for the distribution of specific personal property, such as jewelry and other family heirlooms.
One final important fact: a will has no effect on a TODD. If a conflict arises between the last will and testament and the TODD, the TODD is not changed.²²
Sources ¹ The Texas Real Property Transfer on Death Act, 84th Leg., ch. 841 (S.B. 462), § 1, eff. September 1, 2015. Previously, the State of Texas provided a suggested statutory form under section 114.151 of the Estates Code, but it was repealed effective September 1, 2019. The Legislature has tasked the Texas Supreme Court with creating a new form, which has not yet been implemented. This statute applies to real property in Texas only, although other states have similar deeds, each state is different. ² Tex. Est. Code §§ 22.029, 114.051. ³ See generally, Bob Carlson, 7 Big Estate Planning Mistakes—Not Avoiding Probate, Forbes.com (Feb. 26, 2018, 2:04 PM), https://www.forbes.com/sites/bobcarlson/2018/02/26/7-big-estate-planning-mistakes-not-avoiding-probate/#1d61fecf4503. ⁴ Tex. Est. Code § 114.101. ⁵ See id. § 114.103(a). Although the transfer is immediate, the transferee must have survived the owner transferor for more than 120 hours. The TODD recipient is responsible for all mortgages, liens, encumbrances, and other interests on the real property at the time of transfer. ⁶ See id. § 114.101(1)(A). ⁷ Bruce Japsen, Baby Boomers to Push U.S. Health Spending to $6 Trillion by 2027, Forbes.com (Feb. 20, 2019, 4:00 PM), forbes.com/sites/brucejapsen/2019/02/20/baby-boomers-to-push-u-s-health-spending-to-6-trillion-by-2027/#6f74c127b2d5. ⁸ Russell Heimlich, Baby Boomers Retire, Pew Research Center: Fact Tank (Dec. 29, 2010), https://www.pewresearch.org/fact-tank/2010/12/29/baby-boomers-retire. ⁹ Medicare Interactive.org, https://www.medicareinteractive.org/get-answers/medicare-covered-services/skilled-nursing-facility-snf-services/snf-care-past-100-days (last visited Oct. 27, 2019). ¹⁰ 42 USCA § 1396p. ¹¹ See id. ¹² Id. ¹³ Tex. Est. Code § 309.051. ¹⁴ See id. § 111. ¹⁵ 1 Tex. Admin. Code § 358.401 (2009) (Tex. Health & Human Servs. Comm’n, Transfer of Assets on or after February 8, 2006). ¹⁶ Id. ¹⁷ 1 Tex. Admin. Code § 373.207 (2005) (Tex. Health & Human Servs. Comm’n, Exemptions from Claims). ¹⁸ See id. § 373.215 (2005) (Tex. Health & Human Servs. Comm’n, Recovery Not Cost-Effective). ¹⁹ See id. § 373.209 (2005) (Tex. Health & Human Servs. Comm’n, Undue Hardship Waivers). ²⁰ Tex. Est. Code Ann. § 114.106. ²¹ The Texas Real Property Transfer on Death Act, 84th Leg., ch. 841 (S.B. 462), § 1, eff. September 1, 2015. ²² Tex. Est. Code § 114.057(b).