Potente, Business Lawyer and Company Formation

On January 1, 2016, a new California law went into effect that authorizes the use of a transfer on death deed (“TOD deed”) to allow an owner of certain types of real property to transfer that property to a named beneficiary that is revocable up until the grantor’s death. This transfer takes place upon the death of the property owner, with the beneficiary of such TOD deed having no legal or equitable rights until the grantor’s death. This law will automatically “sunset” on January 1, 2021, resulting in an automatic repeal unless a subsequent statute cancels or extends that date.

At first glance, California’s experiment with the TOD deed provides property owners with an inexpensive alternative to a comprehensive estate plan and allows the property to be transferred at death while completely bypassing the expensive and lengthy probate process. California property owners with less complex estates are seeing this as the answer to avoiding probate without the need to have a revocable living trust. However, when examined with a fine-toothed comb, this new law has many deficiencies and California property owners would be much better off using the tried and true revocable living trust in order to avoid probate.

Below are some issues and red flags the TOD deed raises when compared to using a living trust:

1. Excludes certain types of property. The TOD deed is limited in application – it can only be used for the following types of real property: (a) real property improved with between one and four residential dwelling units; (b) a condominium unit; and (c) a single tract of agricultural real estate (40 acres or less) improved with a single-family residence. ALL other property is excluded from being transferred by a TOD deed.

2. Cannot name a class of beneficiaries. Unlike in a trust, the grantor of the TOD deed cannot name a class of beneficiaries, such as naming “my then-living children” or “my then-living grandchildren”. In order to comply with the Probate Code, the grantor must identify the beneficiary by name in the TOD deed.

3. Recording is required to transfer and revoke. In order to be effective, a TOD deed must be recorded within 60 days of the date it was executed. Additionally, in order to revoke a TOD deed, the grantor must either record another instrument that expressly revokes the recorded TOD deed or the grantor must record a subsequent TOD deed or other deed transferring the property. If there are multiple TOD deeds recorded for a single property, the most recently executed and recorded TOD deed takes precedence.

Contrast these recording requirements with a living trust, in which the trustor does not have to record anything during his or her lifetime and can easily make changes to beneficiaries without those amendments being part of a public record.

4. No anti-lapse provision. Any beneficiary of a TOD deed must survive the grantor; if the beneficiary predeceases the grantor, their interest in the property will lapse. However, unlike in a living trust, the grantor cannot name an alternate disposition of the property passing under a TOD deed – the property may only pass to the named beneficiary. This not only prevents the grantor from naming an alternate beneficiary, but it also prohibits the property to transfer “by right of representation” (i.e., transfer to the issue of a beneficiary who has predeceased the grantor).

5. Does not allow multiple beneficiaries with varying interests. If a grantor names multiple beneficiaries in the TOD deed, the property will vest as tenants in common, in equal shares to the beneficiaries. A grantor may not transfer unequal interests in the property through the TOD deed.

6. Conflicting deeds can cause undesirable results. A timely-recorded TOD deed that conflicts with another instrument that is NOT recorded before the grantor’s death takes precedence over the unrecorded instrument. However, in the matter of a timely-recorded TOD deed that conflicts with another instrument that IS recorded before the grantor’s death, the later executed of the two documents is the operative instrument. This may seem to make sense at first – but these rules could cause some results that do not reflect the grantor’s intent.

For example, suppose a grantor executes a TOD deed a few weeks before his death, but has not recorded it yet. Just a day before the grantor’s death, he changes his mind and decides to quitclaim the property to either a new living trust or another beneficiary. Suppose the quitclaim deed is recorded one day after the grantor’s death and the TOD deed is recorded weeks later, but within the 60 day time frame. Under this scenario, even though it was the grantor’s intent to have the quitclaim deed control, the TOD deed would be the governing instrument for the disposition of the property.

7. Problematic results regarding creditor rights. Perhaps the most concerning issue that arises with the TOD deed is the rights of creditors. Any property that is transferred through a TOD deed remains subject to any liens and encumbrances on the property at the time of the grantor’s death (such as a mortgage). Additionally, if there is a probate proceeding for the grantor’s estate, the personal representative can demand “restitution” from a TOD deed beneficiary up to three years after the grantor’s death – this means a transfer of the physical property or its equivalent value to the probate estate. There is no requirement that the personal representative determines that the property will even be needed to satisfy the grantor’s creditors before making the demand!

What does this mean for the “lucky” beneficiary of the TOD deed? Upon the demand for restitution, the beneficiary must turn the property over to the probate estate, plus any net income received since the grantor’s death. If the beneficiary encumbered the property after the grantor’s death, he or she must also turn over the amount necessary to pay off the encumbrance. It turns out that being a beneficiary of a TOD deed is more burdensome than not in this situation!

Let’s say the beneficiary sold the property after he received it – in this case restitution may still be demanded from the beneficiary in an amount equal to the fair market value of the property as of the date the grantor died and the beneficiary will also be liable for paying a whopping 10% interest rate on the value of the property the beneficiary received. Because the personal representative for the estate has up to three years to make a restitution demand, the 10% interest could add up to a very large amount.

Finally, if the grantor recorded multiple TOD deeds on multiple properties, the law does not address apportionment of debts among them. For example, the personal representative can make a restitution demand on only one TOD deed beneficiary, while leaving the other TOD deed beneficiaries alone.

The above list of issues that arise with using a TOD deed is only a brief snapshot of the problems one may run into under this new law. However, unless and until there are changes and/or more explicit guidance in certain scenarios, a property owner (and eventual beneficiary!) is much better off using a revocable living trust as the vehicle for transferring property and avoiding probate.

Victoria L. Chinsee, Esq.

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This post is for informational purposes only, and merely recites the general rules of the road. Lots of legal rules have exceptions, however, and every case is unique. Never rely solely on a blog post in evaluating your situation — always contact an attorney when your legal rights and obligations are on the line.

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