Transfer-On-Death Designations in Texas
When it comes to estate planning in Texas, there are many different tools and strategies available. One option that is often overlooked, but can be incredibly useful, is the use of the transfer-on-death (“TOD”) designation.
This designation can allow you to name beneficiaries for certain assets, which will then pass to them automatically upon your death. This transfer happens outside of the probate process.
While the TOD designation can be a great way to simplify your estate and avoid probate, there are some important considerations to keep in mind.
What is a Transfer-On-Death Designation?
The term “transfer-on-death” describes the language included in a deed or other document for the transfer of property on death. The language designates a beneficiary for a particular asset, such as a bank account, investment account, or real estate.
When you set up a TOD designation, you specify who you want to receive that asset when you die. Then, when you pass away, the asset automatically transfers to the designated beneficiary without going through probate.
TOD designations can be a great way to simplify the estate planning process, especially for smaller estates. By designating beneficiaries for your assets, you can avoid the need for those assets to go through probate, which can be time-consuming, expensive, and stressful for your loved ones.
How to Set Up a Transfer-On-Death Designation in Texas
In Texas, there are a few steps you’ll need to follow to set up a transfer-on-death designation. The exact process may vary depending on the type of asset you’re designating, but in general, you’ll need to take the following steps:
Choose the asset(s) you want to designate.
The first step in setting up a TOD designation is to decide which asset or assets you want to designate. Common examples include bank accounts, investment accounts, and real estate.
While you may have these designations for your bank and investment accounts, it is unlikely that you have them for your real estate. The reason for this is that the bank will often present you with the designation form when you set up your account. This does not happen with real estate. The title company that does your closing when you buy real estate will not present you with a transfer on death deed. You have to ask for it, and a lawyer will have to draft it.
Determine who you want to designate as your beneficiary.
Next, you’ll need to decide who you want to receive the asset(s) when you die. You can designate one or more beneficiaries, and you can specify how the asset(s) should be divided among them.
It should be noted that there are special considerations if you are married. Texas is a community property state. This means that most property acquired by marriage is owned by both spouses. The transfer on death form or deed may only be valid as to your one-half community interest.
Divorce can also impact these forms. The Texas Estates Code includes a provision that says that transfers to former spouses are void. The bank or investment company will not know of the divorce, which can lead to payments being made to the surviving spouse that should not be. This is a frequent issue that ends up in probate litigation.
Complete the appropriate forms or deed.
Once you’ve chosen your asset(s) and beneficiary(ies), you’ll need to complete the appropriate forms or deed to set up the TOD designation. The exact forms you’ll need to use will depend on the type of asset you’re designating, but they will generally be available from the institution that holds the asset(s).
You may be tempted to simply fill in the boxes on the form. You do not have to do that. It is permissible to say “see attached” and then attach a more detailed description of what you want to happen to the assets. For example, the attachment may note that you intend that your community property share of the assets pass to your surviving children, then say that if you have no surviving children, you want your surviving grandchildren, etc. to take, or to have the assets pass to a trust to be held for minor children, etc. An estate planning attorney can provide you with more detailed language for this.
Keep the forms up-to-date.
Finally, keep your TOD designations up-to-date. If you change your mind about who you want to designate as your beneficiary, or if your designated beneficiary passes away before you do, you’ll need to update your TOD designation accordingly.
This may need to be done more frequently if you have changes in your family situation. An adopted or disinherited child is an example. The same goes for transfers to children who have drug or legal problems or creditors that could lead to the assets being misused or taken by creditors.
Potential Pitfalls of Transfer-On-Death Designations
While transfer-on-death designations can be a useful tool in estate planning, there are also some potential pitfalls to be aware of. Here are a few things to keep in mind.
TOD designations override your will.
One common misconception about TOD designations is that they cannot be used to bypass your will. In reality, TOD designations do override your will. For the assets that are specifically designated, they do override any provisions in your will. So if you have conflicting instructions in your will and your TOD designation, the instructions in your TOD will usually take precedence.
TOD designations can be challenged.
Just like any other aspect of your estate plan, TOD designations can be challenged in court if someone believes they are invalid, fraudulent, or were made under duress or when you did not have the mental capacity to make the designation.
TOD designations can also be challenged if there is a dispute over who should receive the designated asset. For example, a TOD that names two similar persons can result in disputes. Consider the case of a father and son who have the same name, with one being Sr. and the other Jr. The TOD designation may only name the father, as the son may not have been born when the designation was made. If the person who died did not update their TOD designation when Jr. was born, it is then unclear which person gets the assets. If both parties claim an interest, the court may need to intervene to determine who should receive the asset.
To minimize the risk of a challenge, it’s important to make sure your TOD designations are properly executed and documented, as noted above.
TOD designations may not be the best option for every situation. TOD designations can be a useful tool in your estate plan, but it’s important to use them properly and be aware of their limitations.
Our Dallas Estate Planning Attorneys provide a full range of probate services to our clients, including helping with TOD designations. Probate and estate planning is what we do. We have years of combined experience we can use to support and guide you with probate and estate matters. Call us today for a FREE attorney consultation.
Disclaimer: The content of this website is for informational purposes only and should not be construed as legal advice. The information presented may not apply to your situation and should not be acted upon without consulting a qualified probate attorney. We encourage you to seek the advice of a competent attorney with any legal questions you may have.
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