BeneficiariesEstate PlanningLegislative AlertRevocable Transfer

The Revocable Transfer on Death Deed- Analysis of California AB 139

Effective as of January 1, 2016, the State of California now allows the use of a revocable transfer on death deed (“TOD deed”) to convey an individual’s interest in certain real property to specifically named beneficiaries upon the individual’s death without the need for formal probate proceedings. The legislative purpose behind this bill is essentially to provide a simplified method for transferring real property to an individual’s chosen beneficiaries without probate. This has historically been done through gifting before death, risky joint tenancy titling of the property, or the more expensive establishment of trusts. By not gifting the property before death, or adding a joint tenant to the title, the real property owner does not lose control or ownership rights over the property prior to death, and the beneficiary(ies) enjoy greater tax benefits with the “at death” transfer rather than the gift during life. The simplicity of this transfer is appealing, particularly for elderly individuals that own a single home and have very little in the way of cash or other assets, which can make the cost of establishing a trust prohibitive. However, with simplicity often comes higher risk for abuse and self-planning leading to unintended consequences and failed transfers, which is why the legislature has ordered a study of the effects of the Bill, and provided that the law shall remain in effect only until January 1, 2021 unless repealed or extended prior to that date. Here are a few of the key components of the new law:
 
  1. A TOD deed can be created, or revoked, at any time by an owner of real property having the capacity to contract.
  2. The TOD deed must be recorded on or before 60 days from the date of execution.
  3. For purposes of this law, real property is defined as: (1) real property improved with not less than 1 and not more than 4 residential dwelling units; (2) a condominium unit (and common elements/areas/uses included); or (3) a single tract of agricultural real estate consisting of 40 acres or less and improved with a single family residence. Real property interests that do not fall into these categories do not apply.
  4. The beneficiary(ies) must be identified by name in the TOD deed (i.e. cannot simply say “to my children” or “to issue”), and will take title as tenants in common unless otherwise indicated.
  5. If a named beneficiary fails to survive, the gift lapses and goes to the other named beneficiary(ies), or if there is no other surviving named beneficiary, then the gift lapses and passes with the decedent’s estate. The anti-lapse provisions of California Probate Code §21110 do not apply, meaning that the issue/heirs of a predeceased beneficiary related to the decedent will not receive the predeceased beneficiary’s share unless specifically named (by name, and not just “to issue”) as a contingent beneficiary.
  6. Subject to certain exceptions and limitations, each beneficiary remains liable for the decedent’s debts, including a mortgage or other encumbrance on the real property, claims of the Estate Recovery Unit of the Department of Health Care Services, and general creditors, up to the value of the property received by the beneficiary.
  7. A named beneficiary does not acquire a legal interest in the real property until the death of the transferor, and so recording a TOD deed does not subject the real property to the beneficiary’s creditors or other judgements.
  8. TOD deeds are void if, at the time of the transferor’s death, the title to the real property is held in joint tenancy or as community property with right of survivorship. The right of survivorship governs the transfer in this case.
This revocable TOD deed can be a useful tool to effectively and economically transfer a real property asset at death if properly and thoughtfully prepared. However, it is certainly not for everyone, and has a fairly limited scope. A few situations where this would not be a responsible alternative to a trust include: (1) an individual with a minor, spendthrift or disabled beneficiary who would benefit from a trust share; (2) an individual with other parcels of real property that do not qualify for the TOD deed use; (3) individuals with a reasonable chance of outliving the named beneficiaries; (4) individuals with cash and other probatable assets in excess of $150,000; and (5) individuals with substantial debt (it’s much easier for a personal representative or Trustee to resolve debt issues than saddling beneficiaries with that task).
 
It should also be noted that a TOD deed should be part of a well thought out estate plan, and not a substitute for it. I would always recommend that the transferor have a valid Will documenting his or her wishes in the case of a failed transfer, or to direct the transfer of other assets that may be a part of the decedent’s estate. Additionally, a durable power of attorney and advance health care directive should be established to protect the property owner in the case of his or her incapacity. Prior to executing a revocable transfer on death deed I would highly encourage you to contact our offices, or your estate planning attorney, to determine if this truly is the right course of action for you, and, if it is, to make sure that it is done properly.