The Transfer on Death Deed (“TODD”) is a great alternative to transfer Washington State Real Estate and avoid probate. It works equally as well for any Washington State property owner, whether a U.S. Citizen, U.S. Tax Resident, or Canadian Non-U.S. Resident.
In 2014 Washington State authorized a new way to convey real estate outside of probate. The TODD allows a property owner upon death to transfer his or her interest in real estate to the designated beneficiary. In order to become effective, however, the TODD must be recorded during the life of the property owner at the County Auditor’s Office where the property is located.
PROS
1. A property owner may name more than one person as a beneficiary. A property owner may even name a contingent beneficiary or class of beneficiaries who receive the real estate if the original beneficiary dies. This alternative may make sense if the property owner believes all the beneficiaries will share equally in the management, care and expense as future owners of the real estate.
2. Non-Taxable with the IRS until Death (and upon death only if subject to U.S. Estate Tax).
3. Exempt from Washington State Real Estate Excise Tax.
4. The property owner retains full control and power over the real estate until death. Therefore, the property owner may sell, lease, or otherwise use the real estate. The beneficiaries have no right in the real estate until the owner’s death.
5. Fully Revocable if the property owner changes his or her mind upon recording a revocation at the County Auditor’s office.
6. Merely record the Death Certificate to effectuate the transfer subject to estate tax compliance, if any.
7. The beneficiary gets a full-stepped up basis for U.S. tax purposes, meaning that he or she assumes the fair market value of the real estate at the date of death for future taxable events. Often a full-stepped up basis is higher in value than the original cost basis in the property. A higher value should help reduce the amount of the capital gain in the event of a future sale.
CONS
1. As the TODD must be recorded at the County Auditor’s Office in order to become effective it also becomes “public knowledge”. Therefore, it is possible for a “clever” heir to discover the TODD if he or she searches the County records where the real estate is located. This situation may be awkward if the clever heir is not a designated beneficiary in the TODD.
2. The TODD may be subject to challenge by an aggrieved heir who may not be a beneficiary.
3. The real estate is subject to possible creditor claims.
4. Not recommended for minor beneficiaries.
The above list is not exhaustive. There are other pros and cons.
It is best to coordinate the TODD with the rest of your Estate Plan to avoid any conflict.
Further, other non-probate methods may also be considered, including a Trust, Joint Tenancy with Rights of Survivorship, and Tenancy in Common. I recommend you read my blog article about the Community Property Agreement, because this non-probate method may be more advantageous.
With any of the above non-probate alternatives there may be U.S. Estate Tax reporting obligations. A U.S. Estate Tax Return may have to be filed. And it may be necessary to obtain a transfer clearance certificate from the IRS upon death prior to transferring the real estate.
The above is not intended to be legal advice but is general information provided as a courtesy.
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