TODD vs. The Gift

Here is the deal.

We are asked about this scenario often: “ My parent owns a home and/or some real estate. He/she is getting older and is not in great health. My parent wants to transfer his/her home or land to me before something happens. Can we help them? The short answer is sure! We can help – no problem. But, depending on the goal of the parent and child, how to make this transfer may have some big implications. Here are the two ways quickest ways to make this transfer and some advantages/disadvantages to each. Hope you find it helpful.

1) Transfer on Death Deed (TODD)

• Revocable transfer of Transferor’s interest in real property to one or more beneficiaries.
• Effective on the transferor’s death.
• The real estate covered by the TODD will avoid probate.
• Per discussions with several accountants, the TODD will entitle the Designated Beneficiary to “stepped up basis”, meaning the Transferee will receive the real property with a basis as the fair market value in the real property as of the date of death of the Transferor.
• Real property will not be subject to look back period for Medicaid purposes.
• TODD does not vest any legal title while the Transferor is living.
• TODD not subject to claims of creditors of the Designated Beneficiary.
• Transferor will still have the ability to sell the real property; to place a lien and encumber the real property.
• If Designated Beneficiary does not survive the Transferor by 120 hours, the transfer lapses as to the Designated Beneficiary.
• Unless provided in the TODD otherwise, interests are transferred in equal, undivided interests with no right of survivorship.
• TODD transfers title to the real property with no warranty of title.
• Designated Beneficiary under a TODD takes title to the real property subject to all conveyances, liens, encumbrances, or other rights enforceable against the real property.
• Real property will not be considered a probate asset but claims against Transferor’s estate, expenses of administration, and estate taxes are enforceable against the real property transferred by TODD.
• Real Property transferred by TODD shall not be considered property of the Transferor for purposes of Medicaid recovery.
• Be careful – if the Transferor is a joint owner with right of survivorship – the TODD may not be effective unless the Transferor is the surviving joint owner.
• TODD can be revoked at any time before Transferor’s death. Revocation can happen by:

– Another TODD properly signed and recorded.
– Instrument of revocation prepare.
– Divorce decree terminating marriage between Transferor and Designated Beneficiary (if a spouse).
– Subsequent transfer of the real property to another person.
 
2) Gift Deed

• Transfer of Transferor’s interest in the real property.
• Gift Deed is not revocable.
• The Transferor will have no rights in the property after the transfer of the real property by gift.
• The beneficiary/transferee of the Gift Deed will not receive a “stepped up basis” in the real property but will receive the Transferor’s basis in the real property. So, if the Transferor sells the real property at a later time, there is a chance for large tax consequences.
• The Transferee of the real property will own the real property immediately and be responsible for payment of all associated expenses, such as real property taxes, insurance, maintenance, etc.
• Real Property transferred by Gift Deed is subject to the 5-year look back period to where Medicaid can reduce its benefits payable or deny the benefits for period of time based on the value of the property transferred during the 5-year period.
• Transferor will have to file a Gift Tax Return if the value of the real property is more than the allowed annual exclusion amount. Speak with your CPA.