As our last post discussed, it’s relatively easy to transfer money and other liquid assets upon death without needing to open a formal probate proceeding. But what about other assets? You can’t put your house into a bank account. Thankfully, Texas has special laws that allow you to make non-probate transfers of houses and other property automatically upon death. This post will discuss some of those methods and the assets that can be transferred.
Texas Allows TOD Deeds to Simplify the Transfer of Houses and Other Real Property
The Texas legislature made real property transfers a lot easier in 2015 by authorizing transfer-on-death (“TOD”) deeds. In essence, the TOD deed functions the same as a TOD beneficiary designation, which we discussed in our last post. It allows a person of your choosing to receive your real property upon your death automatically without need of a formal probate proceeding. Real property generally means land, land rights, and property affixed to land—for example a residential property, an unimproved lot, or oil and gas royalty rights.
Functionally, TOD deeds require a few more steps than TOD accounts. The property owner must prepare and properly execute a deed with special language according to the relevant Texas Estates Code provisions. Then the property owner must properly file the deed in the county where the property is located. If the property owner wishes to revoke the TOD or change its beneficiary, they must execute another formal document and file it in the deed records. We strongly recommend hiring an experienced lawyer to draft and properly record the TOD deed for you.
Lady Bird Deeds Provide an Alternate Method of Transferring Texas Real Property
Lady bird deeds function similarly to TOD deeds, with a few key differences. Both allow the property owner to cause real property to be transferred upon death without need for a Texas probate proceeding. The legal status of the subject property, however, differs entirely depending on whether you use a TOD deed or lady bird deed. When a person executes a TOD deed, they are still owners of the property until they die, at which time the named recipient becomes the owner. In contrast, when a person executes a lady bird deed, they legally transfer ownership to the recipient at the time the deed is executed, but they retain the right to use, enjoy, and even sell or mortgage the property during their lifetime. This is sometimes called an enhanced life estate. Then, when they die, their rights are extinguished and the transferee owner can actually use, enjoy, mortgage, or sell the property.
You may prefer to use a lady bird deed rather than a TOD deed if certain conditions depend on you not being the legal owner of the subject property. For example, it may be critical to relinquish present legal ownership of the subject property to retain Medicaid or other governmental benefits. Lady bird deeds require their own distinct special language, so we recommend engaging an attorney to draft these deeds.
Texas Trusts Provide Various Ways to Avoid Probate
Trusts are another common tool that Texans use to avoid formal probate proceedings. Please see our article on the basic principles of trusts for a primer on how trusts function.
Trusts offer broad and varied options to transfer property outside of Texas probate. As a very simple and basic explanation, trusts allow a property owner to put property in the control of another person, called a trustee, to manage and distribute the property on specific conditions set by the property owner. The property owner can put any type of property into the trust—for example, real property like land, tangible personal property like jewelry or a family portrait, an ownership interest in a business, or liquid assets like cash, stocks, or bonds.
Importantly for our purposes here, the property owner can include trust terms that tell the trustee how to distribute the property in the trust when the property owner dies. The trustee is then obligated to carry out those terms and distribute the property. All of this occurs outside a formal probate proceeding.
Note that testamentary trusts still require a formal probate proceeding. These are trusts created inside of a will itself, so the trust cannot be created until the will is approved by the judge in a formal probate case.
We strongly recommend engaging a Texas probate attorney if you are dealing with trust issues. Problems can and do arise, for example (1) the trustee not complying with the terms of the trust upon the property owner’s death or (2) a beneficiary demanding more than they are entitled to.
Don’t Forget About Life Insurance
We would be remiss to neglect life insurance, another common way to avoid probate in Texas. Life insurance allows the policyholder—in other words, the person who purchases the policy and insures their own life—to designate one or more beneficiaries to receive cash or securities upon their passing without any need to visit a probate court. There are two exceptions, however, that do require probate. First, if the policyholder neglects to name an actual beneficiary, then the proceeds of the policy would be distributed in that person’s probate estate. Second, occasionally policy holders will name their own estate as the beneficiary. That, too, results in the necessity for a formal probate proceeding.
There are even more tools you can use to avoid probate through non-probate transfers. While less common, they may be effective in your circumstances. Our probate attorneys regularly deal with non-probate transfers by helping beneficiaries claim benefits under non-probate transfers. Our next post addresses the various ways non-probate transfers can fail through claims, contests, and other challenges.
Our Dallas, Texas team of probate lawyers can help you assert your rights to non-probate transfers. We regularly assist clients in Dallas, Fort Worth, Plano, Denton, and throughout Texas. Please contact us as soon as possible if you need legal assistance with challenges to non-probate transfers.