Transfer on Death Deed in New York? The Proposal Needs Better Statutory Language

New York lawmakers are considering proposing legislation that would allow transfer on death (TOD) deeds in New York.

In 2018, State Senator Avella proposed transfer on death legislation (S07267), but the bill did not make it past the Judiciary Committee. (The current draft of the TOD deed is nearly identical to that of S07267.)

We have the opportunity to examine the proposed bill before it is even (re)introduced. The upshot is that the overall proposed TOD deed statute is seriously flawed.

The Good

In Problems with Transfer on Death Deeds (TOD Deeds), Albert Goodwin discusses four problems with TOD deeds: (1) "Transfer on death deeds does not provide for alternate beneficiaries," (2) "Difficulty in getting title insurance," (3) "Inflexibility to adapt to contingencies," and (4) "Is superseded by joint tenancy with rights of survivorship or tenancy by the entirety."

Goodwin's criticism of TOD deeds is general and not specific to the TOD deed rules that are currently being considered in New York.

The good news about the TOD deed draft is that it addresses the first problem that Goodwin identifies because it allows for alternate beneficiaries.

The Bad

(1) Who is the beneficiary?

Section 1(a) defines a "beneficiary" as "a person that receives property under a transfer on death deed."

Section 1(b) defines a "designed beneficiary" as "a person designated to receive property in a transfer on death deed."

Section 11(2) states, "The interest of a designated beneficiary is contingent on the designated beneficiary surviving the transferor. The interest of a designated beneficiary that fails to survive the transfer lapses."

Section 11(4) gives rules regarding more than one beneficiary: "If the transferor has identified two or more designated beneficiaries to receive concurrent interests in the property, the share of one which lapses or fails for any reason shall be transferred to the other, or to the others in proportion to the interests of each in the remaining part for the property held concurrently."

The statutory form uses the terms "primary beneficiary" and "alternate beneficiary."

Problems:

• (1A) The term "primary beneficiary" is not defined in the proposed statute.
• (1B) The term "alternate beneficiary" is not defined in the proposed statute.
• (1C) The form gives space for just one primary beneficiary, even thought the statute allows for more than one. In contrast, the form gives the space for more than one "Owner or Owners Making this Deed."
• (1D) The statute discusses lapses when more than one primary beneficiary is named. It does not discuss lapse when only one primary beneficiary is named. The rule is found only in the form: "If my primary beneficiary does not survive me, I designate the following alternate beneficiary if that beneficiary survives me."
  • We clearly need to use a different form if more than one "primary beneficiary" is named. Presumably, the language of 11(4) trumps the language in the form and the property would go to the surviving primary beneficiaries before it would go to alternate beneficiaries. But the statute should give a clear rule.
  • Can the transferor designate more than one alternate beneficiary? If so, what interests do they take? The statute and the statutory form are silent.

(2) What about COOPs?

Section 1(d) of the proposed statute defines "property" as "an interest in real property located in this state which is transferable on the death of the owner."

Problem:

• (2.1) The definition of "property" is limited to "real property," thereby excluding cooperative apartments from being transferred by a TOD deed. New York law considers cooperatives as intangible personal property. See, e.g., TSB-M-81(1): Condominium and Cooperative Apartment Corporations distinguished. So, by definition, cooperative owners would not be able to transfer their ownership interest by a TOD deed.
• (2.2) Complicating matters is that New York law has transfer-on-death security rules in EPTL Article 13. (For background information on these rules, see Hon. C. Raymond Radigan & Frank J. Gobes, The Transfer-on-Death Security Registration Act, NYLJ, March 29, 2006 (JD Supra link).) It is unclear whether the TOD security rules apply to condominiums. "Although the statute does not refer to shares in a cooperative apartment and the legislative history is silent on the topic, we expect that purchasers and owners of cooperative apartments in some cases will seek to use the new designation," states a post on the website of Smith, Gambrell & Russell, LLP. So, coops will fall in a gap, not clearly governed by the existing TOD securities rules and clearly excluded from the proposed TOD deed rules.

(Update 10/19/2023: Special thanks to Linda Maryanov, a lawyer in Port Washington, NY, for pointing out that the proposed TOD deed rules would not apply to coops.)

(3) Testamentary or nontestamentary asset?

Despite its intent to create a "nontestamentary" asset, the proposed TOD deed actually creates a Frankenstein asset -- a "nontestamentary" asset that is "effective at the transferor's death" but also held in suspense because it is subject to the transferor's debts when the "probate estate insufficient."

Section 3 states:

An individual may transfer property to one or more beneficiaries effective at the transferor's death by a transfer on death deed.

Section 5 states:

A transfer on death deed is nontestamentary.

Section 13(a) states:

To the extent the transferor's probate estate is insufficient to satisfy to satisfy an allowed claim against the estate or a statutory allowance to a surviving spouse or child, the estate may enforce the liability against property transfer at the transferor's death by a transfer on death deed.

Problems:

• (3A) We have a "nontestamentary" asset that is somehow subject to the debts of the "probate estate."
• (3B) We have an asset that is "effective at the transferor's death" yet somehow held in suspense if the decedent also died with a will.
  • How can a TOD deed be effective at death if a fiduciary of the estate can reach the property?
  • If the ownership for the TOD deed vests at the moment of death, then what property right or interest does an executor obtain over the property that is transferred by a TOD deed? Is the fiduciary divesting a vested real property interest or is the vesting inchoate or incomplete until the fiduciary gives some sort of consent? Recent Surrogate Court decisions are answering this question incorrectly for a specific devise. Such confusion can be prevented if it is addressed at the outset, when the statute is drafted.

(4) Capacity to create a deed will!

Section 6 states:

The capacity required to make or revoke a transfer on death deed is the same as the capacity required to make a will.

Problems:

• (4A) Why would the capacity for a TOD deed be the "the same as the capacity required to make a will"? Why is the capacity not the same for making other deeds?
• (4B) Does testamentary capacity mean that an agent under a power of attorney cannot execute a TOD deed, just as an agent under a power of attorney cannot make a will? The proposed statue is silent and confusing.

(5) The only deed or nontestamentary instrument that must be "recorded before the transferor's death."

Under the proposed statute, both the deed and any revocation must be "recorded before the transferor's death."

Section 7(c) states that the transfer on death deed "shall be recorded before the transferor's death in the public records in the county clerk's office of the county where the property is located in the same manner as any other type of deed."

Section 9(A)(2) also requires a revocation to be "recorded before the transferor's death in the public records in the county clerk's office of the county where the deed is recorded."

Under current New York law:

• Recording a deed is necessary only to give priority to the grantee over other grantees; recording is not required to make the deed effective.
• No other instrument (testamentary or nontestamentary) must be recorded before taking effect at death.

Problems:

• (5A) The proposed TOD deed rules would make TOD deeds different than any other deed, which do not require recording prior to death for them to become effective.
• (5B) The proposed rules would also stand alone because no other transfer taking effect at the transferor/testator's death must be recorded prior to death.
• (5C) The proposed rules do not address delays that can occur that are not the fault of the transferor:
  • What happens if there is an administrative delay recording that is caused by the county clerk's office -- due to a backlog or another crisis, such as COVID-19?
  • What happens if there is a delay by the attorney or title company who intends to record but fails to promptly do so?

(6) Disclaimer?

Section 12 provides:

A beneficiary may disclaim all or part of the beneficiary's interest in the same manner as if the interest was transferred in a will.

Problem:

• (6A) EPTl 2-1.11 uses the word "renunciation," while the statute uses the word "disclaim." It should be consistent.
• (6B) What happens when the property is disclaimed? Does the property go to the other designated beneficiary, does it go to the any "alternate beneficiary" (if one is named), is it transferred under the residuary clause in a will, or is transferred under the rules of intestacy?

(7) "nontestamentary" but subject to the "statutory allowance"!

Section 13(a) of the proposed TOD deed rules states that the TOD deed is available to satisfy a decedent's statutory allowance:

To the extent the transferor's probate estate is insufficient to satisfy to satisfy an allowed claim against the estate or a statutory allowance to a surviving spouse or child, the estate may enforce the liability against property transfer at the transferor's death by a transfer on death deed.

Problems:

• (7A) Section 13(a) of the proposed TOD deed rules states that the TOD deed is available to satisfy a decedent's statutory allowance. This rule is in stark contrast to other non-testamentary transfers (such as revocable trusts and Totten trusts), which are not available to satisfy the statutory allowance. See New York: Revocable Trusts are Not Subject to the Family Allowance.
• (7B) Section 13 creates an internal inconsistency with Section 3, which states that the TOD deed is "effective at the transferor's death," and with Section 5, which states that "[a] transfer on death deed is nontestamentary."
• (7C) Exempt property "are not assets of the estate." EPTL 5-3.1(a). Yet, in the proposed statute, "the estate may enforce liability" for the "statutory allowance."
  • Why can't the surviving spouse or child enforce the liability? When the statute identifies "the estate" as being able to enforce the liability, is the statute exclusive of the rights of others to enforce the statute or is it inclusive, and how do we know?
  • If the "estate" enforces the liability on behalf of the surviving spouse or child, then who pays for the estate's expenses -- the proceeding, the new deed, and the sale of the property?

(8) "right of election"?

Under Section 13 of the proposed statute, the TOD deed can be reached for the decedent's debts ("allowed claims against the estate") and the "statutory allowance."

Problem:

• No mention is made of the surviving spouse's right of election. Would a TOD deed also subject to the surviving spouse's right of election?

(9) A mysterious "proceeding to enforce."

Section 13(c) states:

A proceeding to enforce the liability under this section must be commenced no later than eighteen months after the transferor's death.

Problems:

• (9A) Is this proceeding the same one contemplated by SCPA Article 19? If so, then why doesn't the statute say so?
• (9B) Section 13 doesn't consider the problems of a later-discovered will. I've seen some cases that admitted a will to probate that was discovered several years after death. So, in such cases, is the TOD deed property free-and-clear of the decedent's debts?
• (9C) When can a third-party -- a good faith buyer purchasing for value -- rely on a TOD deed? Presumably, under Section 13(c), the good faith buyer's title is clear 18 months after the transferor's death. This rule is different from EPTL 3-3.8, which has a two-year from death rule for probating a will. Why aren't these rules coordinated?
• (9D) Does an executor become entitled to commissions when the estate is insolvent and the executor pulls the property back in? Presumably, yes, because at that point the "nontestamentary" property definitely becomes testamentary.

Given the opportunity, we should draft a better statute for TOD deed than the one that was proposed in 2018 and is being considered again.