Navigating Transfer on Death Deeds and Living Trusts | PFL

Perhaps you’ve heard from a well-meaning friend or advisor that you can use an inexpensive Transfer on Death Deed to keep your property out of court without going to the trouble of creating a Living Trust. If so, read this before you rely on a Transfer on Death Deed to ensure that you aren’t creating more trouble for the people you love.

On January 1, 2016, Assembly Bill 139 went into effect, providing California residents with a new way to transfer residential property to their heirs. Specifically, the law creates a Revocable Transfer on Death Deed (TOD Deed), intended to be a simple tool for transferring ownership of real property to beneficiaries upon the property owner’s death.

The law was initially heralded as a welcome alternative to Revocable Living Trusts, which some believe to be costly, time consuming, and complex. A TOD Deed allows named beneficiaries to assume ownership of your residential property without undergoing probate or trust administration.

However, before you rely on a TOD Deed as a cheaper alternative to full-on Revocable Living Trust planning, consider these factors …

First, the TOD Deed only applies to certain types of real property:

1. A single-family home or condominium,
2. A single-family residence on agricultural property of 40 acres or less, or
3. A multi-family residence with no more than four units.

Moreover, a TOD Deed has several other restrictions and requirements.

1. It must be signed and dated before a notary to be valid.
2. It must be recorded within 60 days from the date it’s signed.
3. It does not permit designation of beneficiaries by class (e.g. “my siblings”).
4. It must strictly adhere to the form prescribed by the statute.

Finally, and most importantly BEWARE of these major risks:
The TOD Deed offers no protection from your creditors.

1. If your property is held joint tenancy, your joint tenant becomes the sole owner upon your death and has full control of the property, and your Transfer on Death Deed is inapplicable.
2. Unlike with a Living Trust, a Transfer on Death Deed cannot be used to manage, sell, or borrow against the property during your incapacity. This means that if you become incapacitated, there’s no action your beneficiary can take to get access to using your property as a resource for your care, as your Trustee could, if you had your property in a Revocable Living Trust.
3. If the beneficiary is a minor upon your death, a court-appointed custodian will need to be named to control your property until the child reaches legal age. With a Living Trust, you get to name the person to handle the property until your child reaches legal age, and you can even set up your trust so that when your child does inherit it, he or she can receive it protected from a future divorce or future creditors.
4. Title insurance companies have been reluctant to insure clear title until three years after the grantor’s death when a Transfer on Death deed is used. During this time, the beneficiary will likely be unable to sell or borrow against the property.
5. The property may be subject to Medi-Cal Estate Recovery,  if you received Medi-Cal benefits.

Unless extended, the new law will sunset on January 1, 2021, but TOD Deeds executed before that date will remain valid.

Warning: Since its inception, significant flaws have been found within the statute, and some advocates believe it will lead to increased elder abuse. For more on this, read a letter from the Executive Committee of the Trusts & Estates Section of the California Bar, appended as an exhibit to the California Law Revision Commission’s Memorandum # 2017-35.

Given these concerns, we recommend against the use of the TOD Deed and advise those seeking to transfer their real estate in a manner that is best for you, and the people you love to schedule a Family Wealth Planning Session™ with a Personal Family Lawyer® to choose an option that will best meet your needs.