California Transfer On Death (TOD) Deeds

Effective on January 1, 2016, California Assembly Bill 139 enacted California Probate Code § 5600, et. seq., which permits an individual to transfer real property upon death using a revocable transfer on death (TOD) deed. The law sunsets on January 1, 2021, unless extended by the California legislature. The TOD deed operates much like a will – it gives those individuals listed in the deed as beneficiaries a future interest in the property, which vests (becomes a present interest) when the owner passes away.

The California legislature enacted this law because it felt single, low income individuals needed cost-effective tools to avoid probate. Indeed, the TOD deed (much like a quitclaim deed or grant deed) is an inexpensive and easy way for a person to transfer real property at death – the deed must be drafted, signed by the grantor, notarized, and recorded at the county recorder’s office. While this may seem like an appealing estate planning tool, there are several restrictions, limitations, and dangers.

Restrictions & Requirements
There are various restrictions on the use of the TOD deed. First, it can only be used to transfer (1) a parcel of property 1-4 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. Therefore, the TOD deed is not available to transfer investment properties and commercial buildings, for example. The TOD deed must also be recorded within 60 days of execution, and it is advisable to record the Q&A document with the deed to ensure compliance with the law. The beneficiaries listed in the TOD deed must be referred to by name, and each beneficiary’s relation to the grantor must be indicated after that beneficiary’s name. For example, “John Smith, my son, Jane Smith, my daughter…”, not “John Smith and Jane Smith, my children”. Also, like a will, a TOD deed can be revoked before the owner of the property becomes incapacitated or dies. However, the revocation document must be signed, dated, notarized, and recorded at the county recorder’s office where the TOD deed was recorded to effectuate the revocation.

Limitations as an Estate Planning Tool
The California legislature enacted this law with good intentions, but the TOD deed certainly has limitations as an effective estate planning tool. For example, if one of the beneficiaries on the TOD deed passes away, this beneficiary’s interest automatically transfers to the other beneficiaries listed on the TOD deed. This is contrary to a normal distribution pattern for revocable living trusts, whereby if one child passes away then that child’s interest is transferred to his/her children (the trust creator’s grandchildren), not the other children. The TOD deed provides no such flexibility. Furthermore, if the TOD deed lists multiple beneficiaries, all beneficiaries will take the real property as co-tenants with equal interests. There is no option for unequal ownership by the beneficiaries after the death of the owner; provided, however, that those beneficiaries can transfer a part of, or all of their interest after the owner passes away.

Furthermore, the law is silent on transfers of property to minors. For example, imagine a property owner would like a minor grandchild to be the beneficiary on the TOD deed. Of course, the owner can list the minor grandchild as a beneficiary on the TOD deed. However, if the owner dies while the grandchild is still a minor, a guardianship of that minor’s estate must be established in order for the grandchild to sell or encumber the property. Establishing a guardianship is costly and time consuming. On the contrary, in a revocable living trust the settlor (trust creator) can designate a trustee to manage the property until the minor becomes an adult. The trustee of the revocable living trust can immediately begin managing the property on behalf of the minor grandchild.

TOD deeds do not offer creditor protection for the beneficiaries also. A beneficiary cannot delay receipt of his/her interest in the real property if a creditor will immediately seize that interest. However, most revocable trusts have a “spendthrift” provision, which allows the trustee of the trust to delay payments to the beneficiary if the trustee knows or reasonably believes the payment will be subject to a creditor. Real property transferred through the TOD deed is also considered the grantor’s property at death for debtor-creditor purposes. This means the property is subject to the grantor’s creditors for 3 months after the grantor’s death, when the beneficiaries have likely gained complete control and ownership over the property.

Legal/Elder Abuse Dangers
The most debated danger the legislature considered regarding the TOD deed was that the ease of execution makes this a dangerous tool for elder abuse. The legislature will undoubtedly evaluate this when the law sunsets on January 1, 2021.

Furthermore, there are many other severe limitations and unknowns regarding the TOD deed. When property is held in a joint tenancy, a deceased person’s interest in real property transfers to the others listed on the deed upon that person’s death. Similarly, a TOD deed becomes effective upon the owner’s death. It is unclear which deed governs if two individuals own real property in joint tenancy and one of those owners executes a TOD deed. Also, if the TOD deed is ineffective for any reason (error in drafting, recording, etc.) then the property is subject to probate. It is also worth noting a TOD deed must be revoked prior to the grantor passing away, and a will or trust cannot revoke or otherwise trump the TOD deed. Finally, legal issues will arise regarding who owns the property if an owner signs a document revoking the TOD deed and that document isn’t recorded until after the owner’s death and after the property is transferred to a different party.

As indicated, the new TOD deed may be a useful estate planning tool in very limited circumstances. The Law Offices of Tyler Q. Dahl recommends utilizing the TOD deed only after consulting with an attorney. If you have any questions about the TOD deed or estate planning in general, please contact the Law Offices of Tyler Q. Dahl for a free consultation.

Disclaimer: This material was prepared for general informational purposes only, and is not intended to create an attorney-client relationship and does not constitute legal advice. This material should not be used as a substitute for obtaining legal advice from an attorney licensed or authorized to practice in your jurisdiction. You should always consult a qualified attorney regarding any specific legal problem or matter.