You may have heard the buzz about the new transfer on death deeds in California which provide a new way to transfer real property on death. Up until recently, the most common ways were through:
- A will;
- Owning property in joint tenancy or community property with rights of survivorship;
- A revocable living trust.
Some of these options are easier to implement than others and some do not avoid probate. There are also tax and liability consequences to consider. For example:
- A will still requires probate and all its delay and costs;
- Joint tenancy avoids probate initially but there are co-tenant liability risks, tax consequences, and a possibility for a subsequent probate upon the death of the surviving joint tenant;
- A trust solves provides more solutions to the above problems, but is more expensive to create up front.
Effective January 1, 2016, California now provides for a revocable transfer on death deed (“TOD”) which if properly recorded serves as inexpensive alternative to avoid probate. However, there is a lot of speculation surrounding it, and it is not a good estate planning tool for everyone. That is why it is important to understand how it actually works and the pros and cons of using it.
How a Transfer on Death Deed Works
A TOD allows an owner of residential real property to name one or more beneficiaries to receive the property immediately upon death without going through probate. However, there are specific rules for using a TOD deed:
- Only for a single family home or condominium unit, or a single family residence on 40 acres or less of agricultural land, or a multiple residence that has no more than 4 residential dwelling units
- It must be signed and dated before a notary public
- It must be recorded within 60 days or less from the date it is signed
- It can be revoked by the transferor at any time.
How to Revoke It
There are three ways to for the owner of real property to revoke a prior TOD:
- Record a formal notice of revocation.
- Record a new TOD with a different beneficiary.
- Transfer/Sell the real property to someone else prior to the owner’s death.
In theory this means that a person who owns real property in their lifetime could execute and record more than one TOD. It is the TOD with the most recent recording date that will be the one in effect.
Benefits of a Transfer on Death Deed
(1) Quick, easy, and inexpensive.
(2) Avoids probate (assuming the beneficiary does not predecease the owner).
(3) A good temporary solution to avoid probate in a crisis situation where real property owner doesn’t have time to create a revocable living trust.
(4) It is revocable during the owner’s life.
Drawbacks of a Transfer on Death Deed
(1) Probate will not be avoided if the named beneficiary on the TOD deed dies before the real property owner.
(2) Problematic for a person or couple with minor children, as a court appointed custodian will actually hold, control, and manage the property until the child turns eighteen, at which time the child will receive it outright.
(3) It is uncertain for those who hold property as joint-tenants as a TOD deed is truly only effective for the surviving co-tenant.
(4) If the property owner becomes incapacitated (stroke, dementia, or other event), there may be no one to revoke the TOD deed which may be necessary due to a change in family, financial, or legal circumstances.
(5) Invites litigation on the grounds of incompetence, undue influence, or fraud.
(6) Possible conflicts and litigation where a TOD deed or revocation deed was not timely recorded.
(7) Possible that it will not protect the home from MediCal estate recovery.
Effect on Creditors
It is important to note that a named beneficiary in a TOD deed does not have any rights to the real property during the owner’s life. The good news for the owner is that the creditors of the beneficiary cannot place liens on the real property. The bad news for the beneficiary is that any liens on the property by creditors of the owner will transfer to them.
Does It work for Co-Owners of Real Property?
Many people, especially married couples, own property together in joint tenancy or community property with the right of survivorship. A TOD deed can be used to name beneficiaries, but the TOD will have no effect unless you outlive the co-owner. This could lead to uncertain results in who ultimately inherits the real property and thus would not be the best option for these type of co-owners.
For example, a Bob and Loretta are married and own their home as community property with rights of survivorship. To leave their family home to their daughter, Lucy, and avoid probate they both record TOD deeds naming her as a beneficiary. Bob dies first and Loretta automatically inherits his half interest in their home. Years later Loretta gets remarried to Tom and adds him to title of the family home as a community property co-owner. Loretta keeps original TOD deed naming Lucy as a beneficiary intact, but dies before Tom. Loretta’s TOD deed is null and void and Tom inherits the family home outright and becomes part of his estate. When Tom later dies, the family home is passed to his heirs and not Lucy. Thus, Lucy is effectively disinherited. This assuredly was not Bob or Loretta’s intended outcome when they recorded their original TOD deeds.
As you can see, using a TOD in joint-tenancy can lead to uncertain and unintended results. Instead, other planning strategies such as a revocable living trust would make more sense to avoid the unfortunate disinheritance result above. That is why it is important to review the benefits of a TOD deed and compare them to the potential drawbacks prior to using them.
Given the number of potential drawbacks to using a TOD deed, they may be an insufficient “do-it-yourself” tool for those who legitimately need legal advice and more comprehensive estate planning. That is why it is important that you discuss your unique circumstances with an estate planning attorney who can help customize your planning to choose the right tools to fit your unique needs and goals. If you are interested in learning more about TOD deeds, or about other methods of protecting and transferring your property through an estate plan, the team at Snyder Law is happy to have a conversation with you.