There are several ways an owner of real property can direct the transfer of real property when they die. Up until recently, the most common ways were through trust and a last will and testament.
In California, transfer on death deed (ToD deeds) is the newest method of transferring real estate. It’s relatively easier and less expensive than estate planning or probate administration. It is also quicker to undertake. In this article, let’s look at the pros and cons of the transfer on death deed.
Transfer on death deed became a law effective January 1, 2016, after California Governor Jerry Brown signed Assembly Bill 139. The said bill established a procedure for transferring real estate property upon the death of the grantee through a revocable transfer on death deed. This allows a person to transfer a real estate property to a family member, long-time partner, and even a friend without the need to set up a living trust.
More than half of the states in the US have this option for real estate. It was first passed into law in 1989, in the state of Missouri. Before Gov. Brown signed it into law, there have been five previous attempts to pass similar legislation.
ToD has been referred to as ‘poor man’s thrusts’ since it doesn’t require setting up expensive trusts to keep the assets out of probate.
A transfer on death deed allows the owner of a residential property to identify one or more beneficiaries who will receive the property immediately upon his death. The property may either be a single-family residence on 40 acres or less of agricultural land, a single-family home or condominium unit or multiple residences with no more than four residential dwelling units.
The deed must be accomplished in the form provided by Probate Code Section 5462. In the said form, the owner of the property states his or her name then provides a description of the property. The form should also list the name or names of the beneficiaries who will immediately receive the said property upon the death of the grantor. The ToD expressly states that the grantor transfers all his/her interest in the described property to the beneficiary(es) on his/her death.
The ToD must be signed and dated before a notary public. It must also be recorded within 60 days or less from the date it was signed. If not recorded within the 60 days, the ToD is void.
Moreover, the ToD can be revoked by the transferor at any time.
In revoking a ToD, a transferor may record a formal notice of revocation. He can also record a new ToD with a different beneficiary. Or he or she can sell the real property to someone else, effectively revoking the ToD.
It should be noted that the real estate will only be transferred when the owner dies. This means that the beneficiary as stated on the ToD won’t have any rights to the domicile when the owner is alive. Moreover, creditors of the beneficiary won’t be able to place any liens on the residence. As long as the owner is living, he or she has the right to sell the property.
Theoretically speaking, it is possible for an elderly who owns a house in California to execute and record 2 or more ToDs. In such cases, the deed with the most recent recording date will be considered the one in effect.
For the uninitiated, there are only a handful of traditional methods of estate planning. These are:
Joint tenancy with right of survivorship will always be a very common kind of titling for real property. In this method, the property is transferred to the spouse of the property owner. But this method becomes useless when the property owner’s spouse has passed away.
Some property owners would also add non-spouse to the list of beneficiaries or joint tenants to avoid probate. While this may sound like a wise idea, there are also concerns about this.
One is that doing would mean that the owner is subjecting the property to the creditors of the beneficiaries. Then there’s a significant tax disadvantage to this method. If the beneficiary inherits the property or other assets from the deceased owner, he or she will receive a ‘step up’ in basis. This means that the date of death value will become the applicable value in calculating the capital gains tax.
It also has the potential to exclude other heirs from the estate plan. For example, husband and wife add their two children to the title of their property. But child 1 dies young, leaving 100% of the property to the other child. This basically means the grandchildren of husband and wife are disinherited due to joint tenancy, even if the couple would want their grandchildren to get their share.
Revocable living trusts are considered the best and most reliable method of estate planning, not all people lean towards it because of the costs involved. First, the owner has to create a revocable living trust with the help of an attorney. He or she would then record a deed transferring the real estate to the revocable living trust. But since attorney assistance is needed, the cost of a revocable living trust is a lot higher than a joint tenancy deed.
Another method of transferring property from an owner to his/her intended beneficiaries is probate proceeding. But there are lots of downsides to this method, from high costs to the time it would take for the beneficiaries to receive their share. Finally, since probate cases are a matter of public record, real property owners and their heirs won’t have privacy at all.
Transfer on Death deed is designed to address and resolve the downsides of the revocable living trust, probate, and joint tenancy.
There are several advantages of ToD that make it very appealing to property owners.
For one, it is very quick and easy to undertake. The owner of the property simply has to fill the form, sign, and date it before a notary public, and then have it recorded. In cases when the owner is too old or sick to undertake this, the beneficiary(es) can do it instead for him/her.
It is also a lot cheaper than a living trust. ToD preparation including the recording fee should set back the property owner or beneficiary anywhere from $300 to $500.
Also, the ToD is revocable as long as the property owner is alive. If the property owner has a change of heart as to who will be the heir to the asset, he or she can revoke the deed or simply record a new ToD to supplant a previous deed.
Another advantage of ToD is that it can avoid the expensive and time-consuming probate. The time and cost of probating an estate generally depend on several factors. In California, it usually takes 7 to 9 months for an average estate to go through probate. In terms of expenses, probate can easily cost 7 percent of the total estate value.
ToD is seen to benefit single people, including widows and widowers. Through ToD, they can skip setting up a trust which could cost around $5,000. They can also skip going through probate.
It can also reduce or completely eliminate the acrimony amongst heirs and beneficiaries which usually happens during a formal probate or trust administration. This is because it dispenses post-death transfer formalities.
Simply put, a transfer on death deed can be an inexpensive, straightforward, and practical way of transferring one’s property upon his/her death. It greatly simplifies the real estate transfer at death.
While there are pros to a transfer on death deed, legal luminaries also say there are a lot of downsides.
One is that it can’t completely avoid a property from going through probate. For instance, if the beneficiary named in the deed dies before the property owner, then the ToD has no effect at all. There’s no provision for designating contingent beneficiaries in a ToD. So if there’s no other beneficiary(es) indicated in the deed, the property goes back to the grantor.
There’s also the fear that because it is very easy to execute, unscrupulous individuals can defraud property owners particularly the elderly. Anyone can gain possession of a house or any real property after downloading an online form, then tricking the elderly homeowner into signing it. Once the document is notarized and recorded, the individual will only have to wait for the elderly’s death.
Moreover, those who opposed the bill say that since the ToD automatically transfers ownership of the property to a named beneficiary, the latter individual can then sell the real estate to another party before anyone realizes what happened.
But legislators who passed the bill into law say that the beneficiary won’t be able to sell the property he or she inherited under a ToD within 120 days after the death of the property owner. This, in a way, protects the relatives of the homeowner as they can file a complaint with the court to contest the transfer of the property to a beneficiary named in the ToD.
Of course, that’s another disadvantage that presents itself. If the legitimate heirs to home would want to sell the inherited home because of urgent and legit reasons, they would have to wait for 120 days before they can dispose of the property.
Also, there’s the fear that if the property owner becomes incapacitated, no one would be able to revoke the deed. This particularly becomes crucial in case the family has to revoke the ToD due to changes in circumstances. The property owner may suffer a stroke or dementia to the point he or she would no longer be able to revoke or record a new ToD.
Even beneficiaries face risks when they receive property from a deceased relative or loved one through ToD. For one, it does not offer protection against the original owner’s creditors. While the beneficiary inherits the real property, he or she will also inherit the personal liability including unsecured debts relevant to the real property. To file their claims, the creditors of the deceased property owner can start a probate proceeding within a year after the death of the original property owner.
The worst-case scenario that can happen to beneficiaries who receive a property under a ToD is the forcible return of the asset. Called “Restitution Demand,” this requires the beneficiary or beneficiaries to return the home or property to the estate. This can happen up to three years after the death of the original property owner. Thus, the beneficiary of the real estate property cannot be assured that he or she would own the property until the 3 year period has lapsed.
If he or she claims the property as a residence, then the house has to be returned to the estate. The beneficiary will have to make other living arrangements.
If the beneficiary sells the property and only receives the Restitution Demand, he or she would have to return the proceeds. The beneficiary will also have to deal with the fact that he/she can’t reimburse expenses spent on the improvement of the property, including property taxes.
Legislators who pushed hard for this law understand that like any other initiative or bill, the Transfer on Death deed is by no means fool-proof. Thus they have set a five-year expiration for the new law to give the authorities, particularly the California Law Revision Commission, enough time to study the effects of the deed.
ToD deeds executed starting January 1, 2016, and then won’t be impacted.
The bottom line is that the Transfer on Death deed simplifies the transfer of real property in California. It is a more cost-effective choice than setting up a Living Trust or going through probate.