The Risks of Simplicity: Understanding Transfer on Death Deeds in New York
For high-net-worth individuals and families in New York, the landscape of real estate succession has shifted over the past year. With the enactment of Real Property Law Section 424 the state introduced an instrument known as the transfer on death deed. This tool has been promoted as a modern, low-cost way to bypass the probate process, but it does not effectively replace a traditional estate plan.
What Is a Transfer on Death Deed?
While the concept appears straightforward, the legal reality is that a transfer on death deed is a specialized tool with narrow applications. For the sophisticated property owner, relying on this instrument without professional guidance can lead to significant financial exposure and unintended distribution consequences.
To understand the problems with transfer on death deeds, one must first understand their mechanics. This deed allows a property owner to name a beneficiary who will automatically inherit the real estate upon the owner’s passing. Unlike a traditional deed, it grants the beneficiary no legal interest while the owner is alive. The owner maintains the absolute right to sell, mortgage, or revoke the deed at any time.
However, the execution requirements are rigorous. The document must be signed by the transferor in the presence of two witnesses and acknowledged by a notary. Most importantly, it must be recorded in the county clerk’s office prior to the owner’s death. Failure to meet these “will-like” formalities renders the deed void, potentially forcing the property back into a lengthy probate proceeding that the owner sought to avoid.
Learn more about how transfer on death deeds work here.
The New York Estate Tax Cliff and Financial Risk
The primary concern regarding a transfer on death deed in New York involves taxation. In 2026, the New York State estate tax exemption will increase to $7,350,000. New York utilizes a “cliff” rule: if an estate exceeds this threshold by more than 5%, the entire exemption is lost. In such cases, the estate is taxed from the first dollar at rates as high as 16%.
Because property passing via this deed is still included in the taxable estate, it can easily push a family over this cliff. Unlike a Revocable Living Trust, which can be structured with credit-shelter provisions to shield assets from this tax trap, a simple deed offers no strategic flexibility. Individuals may find that the “simplicity” of a deed results in a six-figure tax bill that could have been avoided with a more comprehensive plan.
The Incapacity Gap and Asset Protection
Another significant issue is the “incapacity gap.” A transfer on death deed only functions at the moment of death. It provides no authority for a family member or fiduciary to manage, sell, or refinance the property if the owner becomes mentally or physically incapacitated. Without a trust or a robust power of attorney, families may be forced into an expensive and public Article 81 guardianship proceeding.
Furthermore, transfer on death deeds offer no protection against creditors or Medicaid estate recovery. Under New York law, property transferred this way can be “clawed back” for up to 18 months after death to satisfy the decedent’s debts. Because the property remains in the owner’s name during their lifetime, it is also considered a fully available resource for Medicaid eligibility, making transfer on death deeds ineffective for long-term care planning.
Unintended Disinheritance and Marketability Risks
Finally, the statute creates risks regarding the ultimate distribution of assets. If a named beneficiary predeceases the owner, New York’s default rule causes the gift to lapse. This means the property may pass to other surviving beneficiaries rather than to the children of the deceased beneficiary, potentially disinheriting grandchildren. Additionally, the law provides co-tenants with a 180-day right of first refusal, which can complicate or freeze a sale for six months after the owner’s death.
While the transfer on death deed has its place, it is not a substitute for a professionally drafted Will or Trust. To ensure your legacy is protected from tax traps and legal hurdles, it is essential to consult with an experienced estate planning attorney. Bleakley Platt & Schmidt’s Trusts & Estates Practice Group can help navigate potential pitfalls.