D.C.'s New Transfer on Death Deeds: This Could Lead to Problems

On November 20, 2012, Mayor Vincent Gray signed into law D.C. Act 19-547 amending Title 19 of the District of Columbia's Official Code enacting the Uniform Real Property Transfer on Death Act (hereinafter "the Act"). The Act would provide a real property owner the ability, when properly executed and recorded with the Recorder of Deeds, to transfer real property title to named beneficiaries outside of probate upon the real property owner's death. In short, this amendment would allow a person to transfer ownership in real property outside of probate similar to other non-probate assets. D.C. will be joining approximately 18 other statesⁱ that are mostly out west in allowing transfer on death (hereinafter "TOD") deeds.

As I have mentioned in other articles, upon a person's death an asset can be transferred to beneficiaries in a variety of ways. Whether an asset is transferred via your will or not depends on whether the asset is a probate asset that will be transferred by a person's willⁱⁱ or a non-probate assets, like a direct transfer by designated beneficiary (think IRA or 401(K)), joint ownership (tenants by the entirety) or trusts. Each transfer process has positives and negatives associated with that process. In this case, the Act will allow D.C. real property owners to transfer property like an IRA with a designated beneficiary.

At first glance, the D.C. process does not seem that complex. There is a statutory form that needs to be completed that includes the legal description of the real property for the TOD deed. After acknowledging the form before a notary public, a person would pay the appropriate fees and file the TOD deed in D.C.'s Office of the Recorder of Deeds.

A TOD deed cannot be revoked in a person's will just like a life insurance policy or any other non-probate asset nor can a testator use their will to change beneficiaries to piece of real property that has a recorded TOD deed. A person can only revoke a TOD deed by:

1. Completing and acknowledging a revocation form, and recording it in the Office of the Recorder of Deeds;
2. Completing and acknowledging a new TOD deed that disposes the same property and record it; or
3. Transfering the property in question to someone else during your lifetime by recording deed that expressly revokes the TOD deed.

Some other points to consider when creating a TOD deed include:

• The capacity of the transferor, the person creating the TOD deed, in creating/revoking is the same capacity needed for a testator to draft a will.
• There does not need to be any notice by the transferor to the beneficiaries about the TOD deed.
• The beneficiary takes the property subject to all conveyances, encumbrances, assignments, mortgages, liens, etc.
• If the transferor is a joint owner and is survived by one or more other joint owners with right of survivorship the property belongs to the surviving joint owners i.e. a TOD deed does not trump ownership by joint tenancy with the right of survivorship ownership.
• Creditors of the beneficiary have no ability to attach to the real property with a TOD deed until the beneficiary becomes the owner of record of the TOD deeded real property.
• A beneficiary of a transferor on death deed is liable for an allowed claim against the transferor's probate estate and statutory allowances. (See next paragraph for an explanation).

There are other problems with TOD deeds including:

• The situation in which the transferor has more than one child and the transferor names all the children as beneficiaries on the TOD deed. Problems can arise between the children over management of the property like some of the children will want to hold onto the property, other children will want to sell.
• If alternate beneficiaries are designated (like grandchildren) and that first designated beneficiary (child) predeceases the transferor; ownership of the real property could fall into the hands of the alternative beneficiary (grandchild) who could be a minor. This will create the need for court involvement to oversee the minor's interest in the real property.
• If no alternate is named and the beneficiary predeceases the transferor, the property will pass into probate administration and the TOD deed property will be distributed according to the transferor's residuary clause which may be contrary to the transferor's intent.
• Many people proceed with DIY estate planning and do not hire an attorney to draft the TOD deed (and, if a person is using a TOD deed, it is unlikely they have an attorney). That could mean incorrect legal descriptions on the TOD deed, incorrect beneficiary names or other legal issues.
• Because a TOD deed trumps a will, Will verse TOD deed - TOD deed wins. A person's will should confirm that real property transfers via the TOD deed. Many DIYers do not provide all the language that would eliminate potential conflict.
• Title companies hate TOD deeds because of the liability they might incur by being involved in the transfer of real property with a TOD deed.

TOD deeds might be a helpful estate planning tool for a small subset of people that understand the process and have an estate plan that works. But, I can also foresee the D.C. Probate Court being clogged with litigious matters between family members based on the likely problems with TOD deeds.

Basics of Estate Planning: What is a Corporate Trustee?

Last month, I discussed the role of a Trust Protector in a person's trust. I thought I would build off of that to describe another way to ensure a trust is properly managed.

When a client comes into my office and we have determined a revocable living trust is needed, many clients have an idea on who they want to be their first successor trustee. But, many do not have an idea who should succeed that first successor trustee, if the first successor trustee cannot qualify to be the trustee or declines the appointment. Other clients do not want a lay person to be their successor trustee. Further, other clients do not trust anyone to be their fiduciary. Lastly, a person's trust assets could be large enough and complex enough to warrant having more than just one lay person overseeing the trust. In that case, naming a corporate trustee might be the solution.

A corporate trustee is a corporation rather than a person that acts as fiduciary over the trust. The corporation is authorized by law to act in a fiduciary capacity over that individual's trust assets. Typically, a corporate trustee is a bank trust department or trust company. In short, the corporate trustee would just replace the role of your individual "trustee" in managing your trust and would have the backing of an entire department/company.

There are a number of advantages to having a corporate trustee including:

• The advantages of years of experience in managing other trusts that can be applied to your trust;
• Better management of a trust because the corporate trustee's entire job is being a trustee. Naming an individual person as trustee who might have another job means that individual might not always be focused on your trust;
• Better investment experience;
• Greater oversight of the trustee because corporate trustees are regulated by federal and state laws;
• Professional advice that will be objective and not swayed by emotion, sickness, vacation or any other issue that might impact an individual trustee;
• Access to special resources that allows for more efficient management of trust;
• Avoiding potential conflict of interest that arises when a trustee is also a beneficiary of the trust; and
• Avoiding potential family strive or increasing strive that might arise by naming one beneficiary trustee over another.

Like everything in life, there are also some disadvantages in having a corporate trustee, including:

• Lack of personal connection by the corporate trustee that makes the relationship too impersonal in the view of the beneficiaries;
• Beneficiary disagrees with the financial management by the corporate trustee (usually the corporate trustee takes a more conservative approach to investing than beneficiary would like);
• Corporate trustee can be very expensive via their management fees and costs;
• Turnover of employees in corporate trustee's offices creates changing trust management philosophy or disjointed communications between beneficiaries and corporate trustee;
• Inability of corporate trustee to properly manage a closely held business, farm, or other business entity held by trust;
• Corporate trust departments might lack flexibility to deal quickly with unexpected but important trust administration issues increasing beneficiary's anger and frustration with the management of a trust.

Estate of the Month: Estate Tax Issue In the Same-Sex Couple Case Before the Supreme Court

I mentioned about a year ago that the Supreme Court infrequently hears estate planning cases because rarely do estate planning matters raise a federal or national issue. However, sometimes there are matters that the Supreme Court feels the need to address. Last term, the Supreme Court's held oral arguments and issued a ruling denying that a child conceived post-death is entitled to Social Security Survivor Benefits. This week, the Supreme Court held oral arguments on a federal estate tax issue with respect to same-sex married couples. There is also something for non-married opposite sex couples to learn.

On March 27, 2013, the Supreme Court heard oral arguments, in U.S. v. Windsor ("Windsor"). The case at issue involves the applicability of federal laws and benefits to same-sex couples married in a jurisdiction where it is legal. In 1996, the U.S. enacted the Defense of Marriage Act, or DOMA, which stated that federal benefits and inter-state recognition of marriage would only apply to opposite-sex marriages. Section 3 of DOMA codifies the non-recognition of same-sex marriages for all federal purposes, including insurance benefits for government employees, Social Security survivors' benefits, immigration, the filing of joint tax returns, etc.

While the bigger political picture of Windsor is on same-sex marriage, drilling down into the facts of Windsor demonstrates that at the heart of the case are estate taxes. The surviving spouse in Windsor wanted to minimize the estate taxes she would owe as a beneficiary of her same-sex partner's estate. Gee, just like everyone else that wants to minimize their tax liability.

Edie Windsor and Thea Spyer, her partner, were married in 2007, in Canada. While New York recognized the marriage, the federal government did not. When Spyer got sick, she chose to leave her entire estate to Windsor when she died. If Windsor had been an opposite-sex spouse, she would not have had to pay any estate tax because of the federal unlimited marital deduction. The unlimited marital deduction provides that a married person has the ability to gift/transfer unlimited amounts of money to their other spouse without paying any type of tax on that transfer. Edie Windsor had to pay $363,000 in federal estate taxes on the inheritance she received from Spyer. After paying the estate tax, she filed suit against the United States. Edie Windsor argued that DOMA violates the equal protection clause of the U.S. Constitution by not granting the same protections to same-sex married couples as it does to opposite-sex ones with respect to federal benefits. In other words, she should not have had to pay $363,000 in estate taxes.

With the increase in the number of unmarried, opposite-sex couples living together, Windsor demonstrates the dangers of not being considered married in the eyes of the law for same-sex and opposite-sex married couples. If unmarried, regardless of the sex of your partner, you can lose valuable legal protections that estate planning can mitigate.

It will be interesting to see where the Supreme Court Justices go on this one because of the number of inflection points in the case. In 2011, President Obama stated his administration would no longer defend Section 3 of DOMA in court. Some legal experts have argued based on the administration's decision not to defend Section 3 of DOMA then that Windsor does not meet the "case or controversy" clause pursuant to Article III of the U.S. Constitution and the case should be dismissed for lack of standing. If the case is dismissed, this would uphold the Second Circuit Court of Appeal's decision affirming the District Court's ruling that Section 3 of DOMA is unconstitutional. On some level, I find this outcome unlikely, why would the Justice take up the matter to merely dismiss the case on procedural grounds?

I think Edie Windsor has a strong legal argument that Section 3 of DOMA violates the equal protection clause of the 14th Amendment. I do not have the time or space to delve into the esoteric issues of equal protection. But, if the Supreme Court Justices agree with her equal protection argument, then DOMA will be found unconstitutional.

The facts are not a complete slam dunk for Edie Windsor. While New York now recognizes same-sex marriages, it has not always done so. Moreover, the couple was not married in New York or even in the U.S., they were married in Canada. The issue with Windsor is Spyer's death in 2009. Spyer's estate and tax liability would be based on federal and state laws in place in 2009, not changes in laws in later years.

There is a 2006 New York Court of Appeals ruling that held the "New York Constitution does not compel recognition of marriages between members of the same sex. Hernandez v. Robles, 885 N.E.2d 1, 5 (N. Y. 2006). After Hernandez, but not before 2009, that would have created precedent in favor of Windsor. However, New York State Court decisions have issued contrary decisions since Hernandez. These opposing decisions were based on a 2004 informal opinion drafted by the New York Attorney General's office. Attorney General opinions are advisory and not binding. Further, New York did not enact the Equality in Marriage Act granting same-sex couples the right to marry until 2011. Unlike many Supreme Court opinions that are decided on esoteric legal issues, I have a hunch how the Justices view the facts will determine the outcome of this case. If Windsor losses, I am going to guess, the facts will play heavily into the decision and create a rather limited opinion for future legal cases.

Given the controversial nature of same-sex marriages within the political spectrum, it will be interesting to see what the Justices decided. I would not want to be in their shoes.

ⁱ The other states that allow a person to transfer real property via some form of transfer on death deed include: Arizona, Arkansas, Colorado, Hawaii, Illinois, Indiana, Kansas, Minnesota, Montana, Nebraska, Nevada, New Mexico, North Dakota, Ohio, Oklahoma, Oregon and Wisconsin.

ⁱⁱ The PRC could not disclaim probate assets since the PRC had children and, pursuant to the disclaimer rules, the PRC's children would be the next in line to inherit any assets the PRC disclaimed.