Founder
New York recently passed legislation permitting transfer on death deeds, which are similar to the lady bird deed which has become popular in the State of Florida. While both of these options are inexpensive ways to avoid probate, there are some serious disadvantages to them as well.
Both the transfer on death deed and lady bird deed are certainly better options than a life estate deed. With a life estate deed, the beneficiaries become the owners of the property during the Grantor or Settlors’ lifetime, but the Grantor retains the right to live in the property for the rest of his/her life. Besides some adverse tax consequences, this also involves a serious loss of control. It is done primarily to avoid probate but also to become eligible for Medicaid.
With the transfer on death deed and lady bird deed, the current owner retains that ownership and complete control with respect to the property. The owner can revoke the deed, sell the property, change the beneficiaries. There are two major disadvantages, however. The first is that at least in New York, if one of the beneficiaries predeceases the owner, that beneficiary’s share of the property passes not to his or her children, but to the remaining beneficiaries. In Florida, it is unclear what happens to that beneficiary’s share, and a probate or administration proceeding may be required.
A second disadvantage is that if the beneficiaries automatically take the property at the owner’s death, there may very well be conflict among the beneficiaries, in terms of one or more of them wanting to sell the property, while the other(s) may not wish to do so. Until the property is sold, the payment of expenses relating to the upkeep of the property could also become contentious.
A revocable living trust is definitely a better option. With the trust, no one has any interest in the property whatsoever, while the owner is alive. The trust can stipulate that the property be sold and the proceeds distributed, thus avoiding disagreement. It can also stipulate that if a beneficiary passes away before the owner, that beneficiary’s interest will pass to his/her children, and if they are minors or are disabled, provision can be made for a trust for those individuals.
In short, while the transfer on death and lady bird deeds are relatively inexpensive ways to avoid probate, the most flexibility offered, and the best way to avoid conflicts, is to prepare a revocable living trust and transfer the real property into the trust.