Homeowners: 2016 New CA Law to Protect Your Home from Probate
In California, there are a variety of ways to hold title to your home that will dictate who will become the new owner of your home when you die. Starting January 1, 2016, California homeowners can add a new way of holding title to their homes called the "Revocable Transfer on Death Deed" (TOD deed). TOD deed is a non-probate deed whereby you as the homeowner may deed your home to a named beneficiary and the transfer becomes operative on your death but will remain revocable until you die.
California Assembly Bill 139 created the "Revocable Transfer on Death Deed" (TOD deed) as an alternative "poor man’s" estate planning instrument to avoid probate without having a trust. It was approved on September 21, 2015 and will take effect on January 1, 2016 and expires on January 1, 2021.
The TOD deed covers only one to four residential dwelling units, a condominium or agricultural land of 40 acres or less with a single-family residence. To be valid, a form called "Simple Revocable Transfer on Death (TOD) Deed" must be recorded within 60 days of execution in the county where the property is located, must be signed, dated, notarized, must contain a legal description of the property, and name the beneficiaries getting your property and their relationships to the creator of the TOD. (You cannot do a class gift such as "to my children or grandchildren.") . The beneficiary of a TOD deed effectuates the transfer when you die by recording an affidavit of the transferor’s death certificate and notifies Medi-cal of your death. A TOD deed essentially allows a homeowner to execute a deed (instead of a trust) that names a beneficiary who will obtain title to your home when you die without going through probate. This article will examine the advantages and disadvantages of using this new California TOD deed.
The primary goal of the California legislature when they created this new TOD deed was to allow single seniors or widows to escape probate without the need to draft a trust. Some parents add their children on to their house as joint tenants for the sole purpose of avoiding probate. The problem with this method is that the children immediately own part of the house, which may subject the house to the children’s creditors. A TOD deed does not create a present interest for the children, meaning the children only own the house when the parent dies; therefore, the children’s creditors would have to wait until the parents die to attach any of the children’s liens to the house. (The children or people who are the beneficiaries on the TOD deed would be tenants in common.) The parent who drafted the TOD deed giving the home to a particular child or person can change his or her mind and revoke the TOD deed, which is an advantage over quit claims deed or joint tenancy because those are not revocable. The TOD deed will preserve the capital gains stepped-up basis of the house for the children because the house is still part of the parent’s estate when the parent dies. This new law is intended to benefit single people including widows.
What about married people? California legislature’s answer to you would be "married people already have a simple way to avoid probate by holding title to their home as joint tenants or community property with right of survivorship". In theory, this new TOD deed sounds pretty good. Then why do the California Land Title Association (CLTA), California Escrow Association (CEA), California Judges Association (CJA), and California Advocates for Nursing Home Reform (CANHR) all oppose this new TOD deed?
One of the main concerns from these opposing organizations is that this new TOD deed could be used as a new form of financial fraud against elderly or unsophisticated homeowners. TOD deeds are very simple to effectuate, requiring only a signature. Some elderly people can be easily duped into signing documents they do not fully understand.
Another concern is that since the TOD deed is revocable; there is an opportunity for the stacking of these TOD deeds and there could be multiple TOD deeds recorded on the same property over the lifetime of an individual; thus, making it hard to obtain title insurance. When there are multiple TOD deeds, title companies may feel compelled to use much caution in seeking a quit claims deed from every beneficiary who has a potential interest in the home. The concern from the judges and lawyers is that, while the TOD deed makes it easier to do estate planning, they conclude that the TOD deed will create confusions and more litigation that would outweigh any TOD deed’s benefits since judges often see too many unnecessary lawsuits resulting from do-it-yourself estate planning.
The new law does try to combat elderly financial abuse by adding the 120 days rule and the revocability feature. If you find out that mom has transferred her home to Johnny Flybynight via a TOD deed and mom is alive, you can simply have mom revoke it. But if mom is dead, you have 120 days to file a lawsuit against Johnny Flybynight and record a lis pendens on the property so that Johnny Flybynight cannot sell the house. Of course, this 120 days rule might make it burdensome for legitimate heirs to sell a home that they inherited within the 120 days as well.
If the beneficiary who is listed on the TOD deed dies before you, then the TOD deed is worthless and the property would be probated. A trust allows you to name contingent beneficiaries and thus escape probate. A trust allows you to stage your distributions to minor children, for instance: 25% after they graduate from college and another 25% for first time home purchase, another 25% when they reach age 30 and the balance at age 35.
Although, you can revoke the TOD deed at any time if you have the mental capacity to do so, once incapacitated, through dementia, stroke, or other incapacitating event, the TOD deed may not be revoked.
One of the major disadvantages of the TOD deed is that the house will be subject to Medi-cal recovery. The California legislature intended this new law to help the low income seniors who cannot afford to pay the legal fee required to draft a living trust. However, these same low income seniors are specifically the ones who are more likely to be on Medi-cal and thus will lose their homes to Medi-cal. This is in contrast to an irrevocable Medi-cal trust, where the house will not go to Medi-cal but instead will go to the children.
TOD deeds are not a panacea for all estate planning issues. There are many factors to consider in whether to use this new deed. One of the major concerns is that this may be a new tool for bad actors to commit fraud and abuse against the elderly. Because of this potential financial abuse against the elderly, this new law will be an experiment, and that is why California TOD deed will expire on January 1st, 2021. The next five years will be a trial period to test this new law out.
Each method of holding title to your house is critical and each method of transferring your home when you die has its advantages and disadvantages. I am giving FREE office presentations teaching real estate professionals, escrow companies and title companies the effect of various way of holding title, and about the probate process. If you would like to schedule a presentation at your office, please have your office manager email me a request at firstname.lastname@example.org or call me at 626-695-7310 for this FREE office training ASAP. There are a limited number of availabilities.