Estate Planning Without Hassle? California’s Revocable Transfer on Death Deeds

Filed under: Estate Planning

For virtually every estate planning need, there is a legal solution. However, with every legal solution there are pros and cons. For those who wish to transfer California real property without the hassle of probate court, a “revocable transfer on death deed” may be a simple way to accomplish that goal. But does it make sense for you?

What is a Revocable Transfer on Death Deed? In 2016, Assembly Bill 139 (“A.B. 139”) went into effect in California. A.B. 139 provides California real property owners with the ability to quickly and inexpensively transfer California real property without the need for an estate plan or will, while still avoiding the probate process. A revocable transfer on death deed (“TOD Deed”) is a type of deed with “testamentary effect” (meaning it avoids probate) allowing for the quick transfer of real property upon the owner’s death. The deed must be recorded during the owner’s life, is revocable, and does not affect ownership rights while the owner is alive. Once properly executed this deed is recorded in the county in which the property is located, and theoretically once the owner dies the real property transfers to the named beneficiary or beneficiaries.

What are the Pros of using a Revocable Transfer on Death Deed? TOD Deeds are theoretically a less expensive option than traditional estate planning. The idea being, that a California real property owner can complete and record a TOD Deed without the need for an attorney, or more comprehensive (and costly) estate planning. Further, a properly executed and recorded TOD Deed will avoid the time and expense of the probate process. Moreover, the original property owner enjoys full control over the property during their life.

From a tax perspective, the TOD Deed is not considered a transfer during life so there is no present gift and no need to file a gift tax return with the IRS. Additionally, because completing and recording a TOD Deed is not a present gift, it allows the beneficiary to receive a “stepped up” basis for tax purposes, potentially saving the named beneficiary significant capital gain taxes if the beneficiary choses to sell the property. Finally, completing and recording a TOD Deed does not affect real property taxes or cause reassessment during the original owner’s life.

What are the Cons of using a Revocable Transfer of Death Deed? To begin with, A.B. 139 is still relatively new law, so there are still many unknowns, and to complicate matters many commentators believe the law was poorly drafted. In fact, the law is currently only effective for a “trial” period through January 1, 2021. There are also technical requirements and limitations that must be followed carefully and require consultation with a lawyer to avoid costly mistakes. For example, the TOD Deed can only be used for single family homes (four units or less) and condominium units, or single family residences on agricultural property of 40 acres or less. Also, a TOD Deed must be recorded within 60-days of its execution, and is not effective for any real property that is held in joint tenancy.

From an estate planning perspective, the real property transferred pursuant to a TOD Deed could still be subject to probate court if the named beneficiary predeceases the original owner. Further, the TOD Deed will take precedence over a will or trust, which many people may not want or understand. This result is potentially compounded by the fact that a TOD Deed cannot be revoked (at least not without court intervention) after the original owner becomes incapacitated. If the named beneficiary under the TOD Deed is a minor upon the death of the original owner, then a court-appointed custodian will be granted control and management of the property until the beneficiary reaches majority. This court-supervised process is expensive, time consuming and without alternatives.

Finally, California real property transferred pursuant to a TOD Deed will be subject to creditor claims of the original owner. Moreover, the named beneficiary can be held personally liable for all unsecured debts (e.g., mortgages and taxes). In addition to the vulnerability to general creditor claims, property transferred by TOD Deed may also be subject to “estate recovery” for Medi-Cal benefit claims by the State.

While the TOD Deed might be the right choice in limited situations, and A.B. 139 was certainly created in order to help some people avoid the probate process, it should not be utilized without careful consideration and a solid legal analysis of the property owner’s goals and objectives. In general, the TOD Deed is not as predictable, flexible or effective in avoiding court intervention as intended, and the revocable living trust still remains the best way to avoid probate and ensure for the efficient distribution of California real property.

For more information on TOD Deeds, contact our estate planning attorney. Together we can decide if this estate planning tool is right for your situation, and help you discover other methods of avoiding probate.

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