New California Law: Transfer on Death (TOD) Deed
ALERT: New California Law Avoiding Living Trust Arrangements Could Cause More Attorney Fees and Costs of Court Than Intended:
Wow! I just saw a webinar on the new TOD Deed California Law - a potential calamity.
What Is Its Purpose: To pass homes and other specified real property to beneficiaries without probate or the utilization of a Living Trust. The law became effective on January 1, 2016.
Advantages: Significantly less costly than a Living Trust. Typically a deed preparation will cost from $300 to $400 plus the recording fee.
Another advantage allows for the transferor to revoke the TOD deed if there is a change of mind. This is because there is no transfer until the death of the transferor.
Disadvantages: There are no provisions to allow for conditions for the transfer, i.e., at a certain age, contingent arrangements if the beneficiary is deceased or reserving life estates before the transfer. These provisions can be provided in a Living Trust.
The greater disadvantage is the fact that the personal representative of the transferor's estate may demand the return of the property called a "Restitution Demand". This requires the beneficiary to return the property to the estate and such demand period lasts for three (3) years from date of death of the owner/transferor. Thus, the recipient/beneficiary of the real property can't be rest assured that the property is actually vested in ownership by the beneficiary for 3 long years.
What if the beneficiary sells the property and then receives a Restitution Demand within 3 years? The beneficiary would have to return the proceeds, and, possibly more, if it was demonstrated that the fair market value of the property was greater than the proceeds received from the sale.
What if the beneficiary claimed it as the residence? Too bad. The beneficiary must make other living arrangements and the real property must be returned to the estate.
What if the beneficiary has improved the real property, paid real estate taxes, etc.? The beneficiary may well have to retain an attorney to obtain reimbursement for the increase in fair market value which may not equal the amount of expenses put into the property. Payment of property taxes are not reimbursable by the estate to the beneficiary.
The executor of the estate can demand return of the real property subject to the TOD deed even if it can't be demonstrated that such property is needed to satisfy creditors of the estate. The beneficiary of the TOD deed may then have to retain counsel to demand the return of the property or the residue of the property once the estate is closed. This may require the review of an estate accounting to determine if the value of the property was utilized to satisfy creditor claims, taxes, etc. Again, this would probably require retaining an attorney to demand the accounting or a lawsuit against the executor of the estate.
Bottom line: This law, intended to simplify the transfer of real property process to a beneficiary without a Living Trust, is rife with potential claims, lawsuits, court costs and attorney fees.
Balance these potential problems against the cost of a Living Trust which transfers real property without these legal ramifications and allows for a multitude of flexible transfer arrangements.
-Jack E. Stephens, J.D., LL.M.
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