Sunday, May 29, 2022

Tax Consequences of a Transfer on Death Deed

Transfer on Death Deed, Image Source: Rob Daly/Getty Images

Virginia introduced the Transfer on Death Deed in 2013 by adding the language of the Uniform Real Property Transfer on Death Act to Title 64.2 of the Code of Virginia. Since then, it has become a popular part of an Estate Planning package—but what does it actually do? Does it save a client time or money?

These deeds, which are fully revocable by the grantor, can save significant time and expense by being recorded in the jurisdiction in which a grantor owns property. Prior to the existence of the Transfer on Death deed, a transfer of real estate could only be made after the death of the grantor by recording the Will and paying probate tax at 1/10th of 1 percent on average. This may sound minimal, but taking the average home price in Virginia ($335,000.00) this amounts to $335 in probate tax, not including recording fees based on the number of pages of the Will. In addition, the entirety of the Will is entered into public record. Transfer on Death deeds can generally be prepared for less than the probate tax and avoid the necessity of recording the Will of a decedent. Further, a Transfer on Death deed only shows the names of the beneficiaries, no additional information regarding the estate of the grantor is revealed. Finally, after the death of the grantor, the named beneficiaries simply have to present the death certificate to the clerk’s office and the transfer is finalized.

In addition to avoiding probate tax, a Transfer on Death deed preserves the stepped up basis of an heir. If property is transferred during the grantor’s lifetime, the heir receives the grantor’s cost basis, also known as “carryover basis.” This has significant consequences if the heir sells the property. For example, if in 2020 a grantor gave property to his child that he and his wife purchased in 1990 for $100,000, and the child went to sell the property for $400,000 in 2022, the child may owe tax on the $300,000 gain. In contrast, if the grantor was predeceased by his wife and had recorded a Transfer on Death deed any time prior to his death, then passed away in 2022 and his child sold the property shortly thereafter, minimal to no capital gains tax would be due.

The last advantage of a Transfer on Death deed is the flexibility it offers the grantor. The deed is fully revocable by the grantor. This is dissimilar from a Will which must have a codicil executed in order to change its contents. In addition, tracking codicils to a Will can be challenging and increases the chances of a creating a scenario where the intent of the grantor is unclear. In contrast, recorded Transfer on Death deeds have the added security of being a part of public record—but with the advantage of providing limited insight into the grantor’s estate.

In short, these instruments are highly advantageous for the majority of clients and a tool which helps a client avoid probate taxes while still giving his heirs the desirous step up in basis. Please contact our office if you have an interest in having this useful estate planning tool added to your documents.

For questions Estate Planning questions, please contact William Gibson.