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Transfer on Death Deed Thursday, December 22, 2016

The Revocable Transfer on Death Deed: are Trusts a thing of the Past?

The California legislator enacts thousands of laws each year. On January 1, 2016, Assembly Bill 139 became the law, known as the Transfer on Death Deed, which allows a property owner to name a Transfer on Death Beneficiary for his or her real property in a recorded conveyance. Is this a panacea to probate administration? This remains highly arguable.

To make a wise decision on whether to name beneficiaries on your real property, one needs to understand the scope and limitations of this law before availing themselves of the Transfer on Death Deed.

How does the Transfer on Death Deed work? First, you prepare a Deed in the precise format prescribed by the legislator, naming your property beneficiary in a precise fashion, and have the Deed notarized. Next, you must record the Deed in the County where the property is located within 60 days of notarizing it. When you die, the real property will transfer to your named beneficiary without probate. The transfer on Death Deed has no effect until you die, and you can revoke it at any time during your life.

Sounds simple? Let’s look at some issues and complications which this conveyance may pose:

What CAN you transfer? One (of many) shortcomings of this instrument is that it can only be used to transfer (1) a parcel of property that contains one to four residential dwelling units, (2) a condominium unit, or (3) a parcel of agricultural land of 40 acres or less, which contains a single-family residence. As such, you cannot use this transfer for business (commercial) property, or rental homes.

How do I name the beneficiary? You must specifically name your beneficiary using their full name, and you must state how he or she is related to you (for ex., John Brown, my son). A reference to general terms, such as “to all my children” may not be used. Likewise, you may not list any conditions on the Deed; if you do, your beneficiary may need to go to court to clear title.

Conversely, in a living trust, you may name a general class of beneficiaries, and state specific conditions on when and in what proportions a beneficiary can receive their share in the trust, and also specify their age of outright distribution.

What if your beneficiary predeceases you? – You are right back where you started: the property remains in your name alone as if before you recorded the Transfer on Death Deed, and if you die without setting up a trust and transferring the property to your trust, it will trigger probate administration.

Conversely, in a living trust, you’d appoint contingent beneficiaries, and probate will not be needed even if your first-named beneficiary dies.

What if you wish to name a minor as a beneficiary? You could do so, but because minors cannot take title to property, on your death, if the beneficiary is still a minor, a Guardianship Estate would need to be established for the minor, in order to take title to the property. Guardianship proceedings are very expensive, time-consuming and very closely scrutinized by the Court.

Conversely, a living trust would avoid this because you name at what age you want the child to receive the property (age of outright distribution), and the Successor Trustee of your trust would manage the real property for the Benefit of the beneficiary until he or she is of age to receive it outright (you specify what age).

Can you name more than one beneficiary? Yes – and your beneficiaries will become co-owners in equal shares as tenants in common.

What if one of the several named beneficiaries dies before you? Then on your death the entire property would go to the surviving beneficiar(ies). But what if you wanted it to go to the deceased beneficiary’s children? You could accomplish that had you set up a Trust and let the Trust own the property instead, but you cannot accomplish this result through the Transfer on Death Deed.

How can the Deed be revoked? There are three ways to revoke a recorded Transfer on Death Deed: (1) create, have notarized, and record a Revocation Deed; (2) create, have notarized, and record a new Transfer on Death Deed; or (3) sell or gift the property, or transfer it to a trust, before your death, and record that conveyance – because a Transfer on Death Deed only “speaks” upon your death, and a subsequent transfer during your life (to a Trust, or via gift or a sale) would essentially revoke the previously recorded Transfer on Death Deed.

Note that you cannot revoke this Deed by a Will!

What if you gift or sell the property described in a Transfer on Death Deed? If the conveyance document used to gift/sell the property is recorded before your death, the Transfer on Death Deed will have no effect. But if it is not recorded before you die (i.e., if you die during pending escrow), the Transfer on Death Deed will take effect notwithstanding the contemplated sale.

What about your debts? A property transferred to a beneficiary by Transfer on Death Deed is subject to your creditors. To take title to the property, your beneficiary must record evidence of your death (your Death Certificate), and file a Change in Ownership Statement with the County Assessor’s office. If you received Medi-Cal benefits, your beneficiary must notify the State Department of Health Care Services of your death and provide a copy of your death certificate. Any creditors of your estate have rights to the property subject to the Deed, to the detriment of the named beneficiary.

Conversely, if the property is owned in Trust, the Trustee can maneuver any creditors’ claims in a way that may be able to have less direct impact on your beneficiaries.

What if I own property as a Joint Tenant? If you are the first joint tenant to die, the deed is void and has no effect, because by operation of law, the property will transfer to the surviving joint tenants, and not according to the Transfer on Death Deed. If you are the last joint tenant to die, the deed takes effect and the property goes to the named beneficiary.

On balance, the Transfer on Death Deed appears to be a very volatile manner of passing on inheritance. Conversely, through a living trust, you will have a lot more control over the distribution of ANY property you own (real and personal), to whomever you wish, at the time you desire them to receive it, on the conditions you set, and will provide for contingencies in the event a beneficiary predeceases you. A living trust extends to all of your assets, not only a single piece of real property.
A property drafted estate plan includes not just a Living Trust, but at a minimum also a Pour Over Will, a General Grant and Assignment, a specific Business Interest Assignment, if own a business, and a set of Powers of Attorney – for financial management, and for health care decisions, and is a comprehensive way of planning for inheritance transfer.

This bill has a sunset date of January 1, 2021. The bill would require the California Law Revision Commission to study and make recommendations regarding the revocable TOD deed to the Legislature by January 1, 2020. As such, the future of this type of testamentary transfer is not entirely clear.

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