In the event that too much time has passed in order to probate a will, or if someone has passed away without ever executing a will, there are still alternatives for the survivors of the deceased to clear up the estate. These alternatives include, but are not necessarily limited to Small Estate Affidavit, Affidavit of Heirship, Muniment of Title, and Deeds Transferring Property out of Probate.
Small Estate Affidavit
When a person dies intestate with an estate value of less than $75,000 (excluding the homestead and exempt personal property), a small estate affidavit may be a valid alternative to probate. This can be a useful option for persons who die intestate with the majority of their estate consisting of their homestead and non-probate assets like transfer on death accounts or other accounts with designated beneficiaries. Importantly, the small estate affidavit is only an option if the homestead is the only real property owned by the decedent and the property is to be inherited only by the decedent's spouse or minor children. These requirements make the situations in which the small estate affidavit can be used fairly limited.
The small estate affidavit will allow the person's estate to be distributed without the appointment of a personal representative. Small estate affidavits are governed by Texas Estates Code Chapter 205.
In order to qualify to utilize a small estate affidavit, the following requirements must be met:
(1) 30 days have passed since the death;
(2) No petition for the appointment of personal representative has been filed or granted;
(3) The value of the estate assets, excluding the homestead and other exempt personal property, on the date of the affidavit do not exceed $75,000;
(4) The affidavit setting forth family members, estate assets, known liabilities, and distributees of the estate;
(5) The judge approves the affidavit; and
(6) The distributees (people receiving assets) comply with the statute.
Importantly, note that the value of the estate is determined not on the date of death as is usually the case, but the date of the affidavit being executed. Additionally, the $75,000 asset limit does not include the person's homestead, exempt property, or non-probate assets (such as retirement accounts or other accounts that will pass via contract to designated beneficiaries rather than by probate). For rural land, the homestead may be up to 200 acres per family or 100 acres per single person. See Texas Property Code Section 41.002. Personal property up to $50,000 per single person or $100,000 per family that will be used for the use and benefit of the decedent's spouse, minor children, unmarried adult children, or incapacitated children is excluded from the estate value calculation. See Texas Property Code Section 42.001. There are a number of types of property that may be included under the definition of personal property including home furnishings, farm or ranch vehicles and implements, tools and equipment used in a trade or profession, jewelry, two firearms, and specific numbers of various species of livestock. For more details, see Texas Property Code Section 42.002. Lastly, keep in mind that non-probate assets are not counted toward the estate value, so were a person to have beneficiary designations or transfer on death accounts for all financial accounts, these would not be included when determining the value of the estate with regard to the $75,000 limit.
Do note one important limitation–the only real property that may be transferred pursuant to a small estate affidavit is the decedent's homestead. See Texas Estates Code Section 205.006. That transfer may only be made to the decedent's spouse or minor children; if anyone else is receive an interest in the homestead, a small estate affidavit is not a viable option. See Texas Estates Code Section 353.051.
Affidavit of Heirship
An affidavit of heirship may be an option in both situations where the person died with a will or died without a will (“intestate”). The affidavit of heirship is essentially the sworn statement of someone with knowledge regarding the surviving relatives of and property owned by the decedent. This is not an option where there may be unknown heirs. It may be useful in situations where real property is the only asset. These affidavits will likely not be options for estates with bank accounts or other financial assets as financial institutions are unlikely to recognize the affidavit of heirship since it is not executed by the probate court.
Affidavits of heirship are not based on statutory authority, but there is a statutory form for drafting an affidavit of heirship found in the Texas Estates Code Section 203.002. The form essentially identifies the person executing the affidavit, the deceased, the relationship between the two, and then sets forth the family members of the decedent including spouse, children, parents, siblings and any property owned by the decedent. The affidavit is filed with the County Clerk to be filed in the property records, rather than with the probate court. The affidavit may be executed by anyone with knowledge of the facts set forth in the affidavit, but depending on circumstances, there may be situations where a disinterested person to execute the affidavit may be necessary. For example, title companies often require that two disinterested persons execute the affidavit.
Muniment of Title
My friend and estate planning attorney, James Decker, refers to a muniment of title as “express lane probate.” It is not necessarily an alternative to probate, but a different–simpler–approach to the probate process. This option may be ideal in circumstances where a person owned limited property such as a house or one tract of land and where there is no debt other than that secured by a real estate note. Importantly, a valid will is required in order to utilize probate as a muniment of title.
The probate of a will as muniment of title is governed by the Texas Estates Code Chapter 257.
Essentially, a muniment of title transfers title to property as directed by the decedent's will without having an administration, meaning there are no Letters Testamentary issued by the court and no Executor appointed. In order to qualify for a probate as muniment of title, a court must determine that a valid will exists and should be admitted to probate, and either (1) the estate does not owe any unpaid debt, other than any debt secured by a real estate lien or (2) there is another reason that there is no necessity for administration of the estate. See Texas Estates Code Section 257.001.
An application for the probate of a will as a muniment of title including a number of required details must be submitted to the probate court. See Texas Estates Code Section 257.051. Once an Order admitting a will to probate as a muniment of title is granted, this is sufficient authority for persons to purchase, transfer, or otherwise transfer assets in accordance with the will.
Deeds Transferring Property Outside of the Probate Process
I also want to mention that there are deed options that would result in the transfer of property outside of the probate process. These include Transfer on Death Deeds, Life Estate Deeds, and Lady Bird Deeds (aka Enhanced Life Estate Deeds). Each of these deeds must be executed before the death of the owner and will result in automatic transfer without the need for probate once the death does occur.
Transfer on Death Deeds (TODD)
In 2015, the Texas Legislature created statutory guidelines for “Transfer on Death Deeds” in Texas. The “Texas Real Property Transfer on Death Act” provides the requirements for using a transfer on death deed (“TODD”) in Texas. Importantly, these statutory requirements apply only to a deed executed on or after September 1, 2015 by a transferor who died on or after September 1, 2015. Any deeds attempting to directly transfer real property at death prior to that date may be effective, but will not be governed by the provisions discussed below.
What is a TODD? A TODD is a legal document that transfers an individual's interest in real property to one or more designated beneficiaries effective at the transferor's death. The TODD requires the property owner (the “transferor”) to name a person (the “beneficiary”) to whom property will automatically transfer at the death of the transferor.
The creation and filing of a TODD does not impact the rights of the transferor while living. In other words, the transferor retains all rights and control over the property, including the right to sell, transfer, encumber, and use the property. A TODD does not change ownership of or rights to the property until the death of the transferor.
Lastly, keep in mind that in a situation where a valid TODD and a will are in conflict, the TODD will control and the real property will pass in accordance with the TODD, rather than the will. This is true regardless of which document was created first and regardless of whether the will expressly states it is intended to override the TODD.
Who can execute a TODD? In order to execute a valid TODD, a person must have contractual capacity. Note that a person with power of attorney may not create a TODD on behalf of another.
What can be transferred by a TODD? Any real property in Texas may be transferred by a TODD.
What must be included in a TODD? A TODD must contain the essential elements of a deed and must also state the transfer of real property to a designated beneficiary (or beneficiaries) is to take place at the death of the transferor. Importantly, the property description that must be included in the deed should match the deed originally granting the property to the transferor. The property description from the Appraisal District, for example, may be insufficient or inadequate to satisfy the necessary requirements of a TODD description.
What must be done with a TODD? In order to be effective, the TODD must be executed and recorded in the deed records at the county clerk's office where the property is located prior to the transferor's death. If the TODD is not recorded prior to death, it is not effective. Importantly, unlike other deeds, there is no requirement that a deed be delivered to or accepted by the beneficiary. A TODD is effective if executed by the grantor and filed, without any action by or even knowledge of a beneficiary.
Can a TODD be revoked? Yes. A TODD is always revocable, even if the deed states that it may not be revoked. Any provisions of irrevocably will be ineffective. In order to revoke a TODD, the transferor may file an instrument of revocation expressly revoking the TODD, or may execute and file a subsequent TODD that revokes all or part of the prior TODD either by expressly revoking or by inconsistency between the two TODDs. Keep in mind that any subsequent revocation or TODD must be recorded prior to the transferor's death in order to be effective. Additionally, the creation of a TODD does not prohibit the transferor to sell, gift, or otherwise transfer ownership of the property during the transferor's lifetime. Thus, if a transferor were to make a transfer of the property while living, the TODD would essentially be revoked as the transfer of the property would be immediately effective.
One other note on revocation involves divorce. If a transferor and a designated beneficiary were married when a TODD was created and subsequently divorce, the TODD is revoked only if the final judgment of divorce is recorded in the deed records where the TODD is recorded prior to the death of the transferor. The mere fact that a divorce occurred would not revoke the TODD.
What other rights are affected by a TODD? Certain property transfers can impact rights of a transferor. Here is how a TODD may or may not impact the most common of these rights:
- A TODD does not affect the transferor's right to claim the property as their homestead.
- A TODD does not affect any property tax exemptions afforded to the transferor (i.e. over 65 years old exemption).
- A TODD does not affect the rights of creditors of the transferor.
- A TODD does not trigger a “due on sale” or similar clause in a mortgage or other type of loan document.
- A TODD does not subject the property to claims of a creditor of the beneficiary.
- Because the TODD does not transfer ownership of the property until the death of the transferor, the property receives a step up in basis adjustment at the transferor's death.
- Since the TODD is not a completed gift until the death of the transferor, is not considered a taxable event for the purposes of gift taxes.
- The TODD statute states it does not affect the eligibility of the transferor or named beneficiary to any form of public assistance, subject to federal law. This provision combined with the fact that the TODD does not actually transfer ownership of the property until the transferor's death means a TODD should not affect the qualification for Medicaid benefits for either the beneficiary or transferor. In other words, executing a TODD should not trigger the Medicaid transfer penalty.
- By executing a TODD, the property at issue is no longer considered part of the transferor's probate estate, meaning that property subject to a TODD should avoid Medicaid Estate Recovery, at least under current law.
What action must the beneficiary take at the transferor's death? At the death of the transferor, a beneficiary must record an affidavit of death in the deed records in order to become the legal owner of the property. In the event the beneficiary wishes to disclaim his or her interest, normal disclaimer procedures under the Texas Estates Code Chapter 122 should be followed.
What are the pros of a TODD? A TODD can be attractive as a means to transfer ownership of real property quickly and affordably without going through the probate process. A TODD allows the transferor to keep control over the property during his or her lifetime and allows the transferor to revoke the TODD at any time. With regard to Medicaid, at least under current law, executing a TODD may allow a transferor to avoid potential Medicaid recovery, while not triggering the Medicaid transfer penalty.
What are the cons of a TODD? First, because TODDs are so new, there is simply not very much law related to these instruments, which may lead to uncertainty for lawyers and clients alike. One potential downside of a TODD is the recording requirement for both the TODD itself and any revocation of the TODD. If a transferor fails to properly record the document prior to his or her death, it is ineffective and that could lead to unintended consequences at the transferor's death. Lastly, people may not understand the concept that a TODD essentially trumps a will if both address the same property, which again could lead to unintended consequences is a TODD was executed in addition to a will.
Enhanced Life Estate Deeds (Lady Bird Deeds)
Unlike Transfer on Death Deeds, Lady Bird Deeds (“LBD”) are not a statutory creation, meaning there are no set statutory guidelines regarding these documents. Instead, it is Texas case law that governs the interpretation of LBDs, and there are actually very few cases on this topic.
What is a LBD? A LBD is a deed that transfers a person's (the “grantor”) interest to another (the “remainderman”) but reserves a life estate in favor of the grantor. Unlike a traditional life estate deed, a LBD's retained life estate interest includes not only the right to occupy and use the property, but also includes the ability to sell, convey, lease, or mortgage the property without the consent of the remaindermen. The grantor has no obligation to obtain permission of the remaindermen to take any of these actions and does not have an obligation to account to them for any income the grantor receives. This is the key distinction between a life estate deed and a LBD.
Who can execute a LBD? Anyone with contractual capacity may execute a LBD. Unlike a transfer on death deed, an agent acting under a power of attorney may execute a LBD. This is a key distinction between LBDs and transfer on death deeds.
What may be transferred by a LBD? Any real property in Texas can be transferred by LBD.
What must be included in a LBD? A LBD is simply a deed that includes the designation of remaindermen and reservation of the life estate and enhanced rights to the grantor. It may be in the form of a general warranty deed, special warranty deed, or a deed with no warranty. As with any deed, the property description that must be included in the deed should match the deed originally granting the property to the transferor. The property description from the Appraisal District, for example, may be insufficient or inadequate to satisfy the necessary requirements.
What must be done with an LBD? Like any other deed, a LBD must be executed by the grantor, and recorded in the deed records in the county where the property is located.
Can a LBD be revoked? Yes. The LBD grantor has the right to revoke the LBD either by filing a revocation document or by filing a subsequent conflicting LBD. Additionally, the LBD allows the grantor to retain all control, including the right to sell, gift or otherwise transfer the property. Thus, the grantor could sell, gift, or transfer the property during his or her lifetime, which would result in cancellation of the LBD.
What other rights are affected by a LBD?
- A LBD does not affect the grantor's right to claim the property as their homestead.
- A LBD does not affect any property tax exemptions afforded to the grantor (i.e. over 65 years old exemption).
- A LBD could potentially trigger a “due on sale/transfer” clause in a mortgage or other loan. Although the interest transferred to a beneficiary is minor and could be revoked, a mortgage or other loan document could view the execution of a LBD and a transfer sufficient to trigger the due on sale clause. This is different than the case of a transfer on death deed, because there the actual transfer does not occur until the death, whereas here, the remainder interest is granted upon execution of the LBD. This may be a key consideration to consider when determining whether to use a LBD or a transfer on death deed.
- A LBD generally does not subject the property to claims of a creditor of the remainderman. The remainderman has no interest in the property while the grantor is alive. Additionally, if any remainderman creditor seeks to take action regarding the property, the grantor could simply revoke the LBD.
- Because the property remains part of the grantor's estate, the property does receive a stepped up basis adjustment at the death of the grantor. This is important for capital gains tax purposes if the property is ever sold.
- Since the LBD is not a completed gift, the designation of remaindermen is not considered a taxable event for the purposes of gift taxes.
- The LBD grantor retains the right to take back the property, a LBD should not be considered a transfer for purposes of the Medicaid transfer penalty.
- By executing a LBD, the property at issue is no longer considered part of the grantor's probate estate, meaning that property subject to a LBD should avoid Medicaid Estate Recovery, at least under current law.
What action must be taken by the remainderman at the grantor's death? The LBD allows the property to pass outside the probate process. At the death of the grantor, the title of the property vests in the specified remainderman without going through the probate process. Generally, a remainderman will file an affidavit or some other document notifying that the grantor has passed away and that the ownership has fully vested in the remainderman.
What are the pros of LBDs? The key benefit of a LBD and purpose for which they were created was to assist with Medicaid planning. As noted above, the execution and filing of a LBD is not considered a transfer for Medicaid purposes. This means the Medicaid transfer penalty is not triggered. Additionally, because property passing through LBD is not considered part of the decedent's probate estate, it is not subject to Medicaid Estate Recovery, at least under current law. Additionally, the use of an LBD will allow the property to pass outside the probate process.
What are the cons of LBDs? One of the biggest downsides to a LBD is simply the lack of Texas law regarding this type of deed. Unlike transfer on death deeds, there is no statute governing the use of LBDs and very little case law on them as well. There is no standard form or statutory guidance of using a LBD. Additionally, because there is no statutory authorization for these types of deed, a court decision could greatly change the legal status of LBDs at any time. Additionally, as noted above, a LBD could potentially trigger a due-on-sale/transfer clause in a mortgage, which could certainly cause unintended consequences for the grantor.