By Staci Yamashita-Iida
You may have heard the buzz about California’s newest real estate practice: the Transfer on Death (“TOD”) deed. As of Jan. 1, 2016, Californians can transfer real property upon death to named individuals through a TOD deed. Up until then, the most common ways to do so were: (1) through a living trust; (2) through joint tenancy or community property with right of survivorship (for married couples); or (3) through probate (or through a will).
The TOD deed is the newest alternative to the above three options. Since it is still a relatively new process, there is a lot of speculation surrounding it. While it does prove to be helpful to some, it is not a good technique for all. This article describes a few pros and cons of the TOD deed to help determine whether or not it’s the right Estate Planning tool for you.
Pro #1: Avoids Probate
One of the main reasons why the TOD deed was created was to allow California residents a straightforward way to transfer real property without subjecting their beneficiary(ies) to probate. Probate is an expensive, lengthy and tedious legal process that occurs when a proper Estate Plan is not in place.
One caveat is that the TOD deed only avoids probate if the beneficiary survives you. So, if you name your son as the TOD beneficiary and he passes away in a car accident, then the property will still be subject to probate upon your death.
Pro #2: Cost Effective
The TOD deed is often referred to as a “Poor Man’s Trust” as it is a substitute to the standard living trust. A good Estate Plan — which is comprised of a living trust, pour-over will, powers of attorney and other ancillary documents — can cost thousands of dollars. A TOD deed can be purchased online for a nominal fee. The only other costs would be the charge for the notary public and the recording fee (the deed must be filed with the County Recorder’s Office).
Pro #3: Revocable
During your lifetime, you have the ability to revoke the TOD deed at any time. Let’s say, for example, that you name your sister, Evelyn, as your TOD beneficiary. If you later have a falling out, you have a few different options to consider.
First, you can record a formal notice of revocation. This would officially remove your sister as the beneficiary of your real property. Just remember that this puts you back at square one; the property would still be subject to probate upon your death unless further action is taken.
Second, you can record a new TOD deed with another beneficiary. This would require the same process as the initial creation. The new deed would simply supersede the old one.
Third, you can transfer or sell the property to someone else prior to your death. If you decide to sell your home and move to a different state, there is no trouble in doing so.
Bottom line, you are still in control of your property for as long as you live. Although your beneficiary designation is publicly recorded, that individual(s) is not entitled to the property during your lifetime. If you make a change, the beneficiary has no right to contest or complain, as they are not yet the legal owner.
Pro #4: Step-Up in Basis
One of the biggest tax advantages of creating a living trust is that the beneficiaries receive a step-up in basis upon the trust creator’s death. Like a living trust, the TOD deed also allows for a step-up in basis. That means that if the beneficiaries sell the home shortly after your death, they pay little to no capital gains taxes.
Con #1: Limitations to Beneficiaries
Unlike a living trust, the TOD deed is not easily customizable. For example, you cannot leave your property to a class of people – e.g., “to my children” or “to my grandchildren.” The beneficiaries must be specifically named. In a sense, it “punishes” future family members simply because they were not born at the time you created the TOD deed.
Additionally, as stated earlier, the TOD deed only works if your beneficiary outlives you. You are not permitted to designate contingent beneficiaries.
With a living trust you can, for example, bequeath your home to your three children in equal shares. If one predeceases you, then that one-third share can be inherited by his or her children. The home will be transferred to your two children and your grandchild(ren).
With a TOD deed, however, if your name your three children as beneficiaries and one passes away, the surviving two inherit the entire home; the deceased child’s children receive no part of it.
Furthermore, if you only have one child and he or she passes before you, then your home will be probated upon your death. While the TOD deed is viewed as a probate avoidance device, it only qualifies as such if all circumstances play out exactly as intended.
Con #2: It Can Still Be Expensive
Although the TOD is deemed the cheaper alternate to a living trust, it can be more expensive in the long run. Many individuals who try to create a cheap, DIY “Estate Plan” with a TOD deed do not realize: (1) it only applies to certain types of real property; (2) it is not legally effective unless it is recorded with the court within 60 days of being signed; and (3) it must have a complete and accurate legal description, which is often confusing for a layperson to locate and reproduce. Mistakes regarding any of the above will result in an invalid and ineffective deed.
In addition, the TOD deed invites litigation on the grounds of fraud or undue influence. The deed must only be acknowledged by a notary public, who is not expected to recognize the signs of elder abuse. If Exploiting Ellen convinces Trusting Tom to name her as the TOD beneficiary and Daughter Delia later challenges the deed, a court proceeding may be needed to resolve the issue, resulting in costly attorney and court fees.
Con #3: Inability to Revoke
As previously mentioned, the TOD deed is revocable during your lifetime . . . provided, however, that you have the requisite capacity to do so. If you become mentally incapacitated (by stroke, Alzheimer’s or dementia, or another event), then you cannot revoke the TOD deed. This may prove difficult if there are changes in family, financial, or legal circumstances.
Let’s say, for example, that you name your only son as the TOD beneficiary. Years later, he applies for Medi-Cal benefits, and you subsequently become incapacitated. If he already has his own home, then receiving yours in addition may jeopardize his Medi-Cal benefits. While you’re able to include special provisions in a living trust to preserve an inheritance and public benefits, this option is not available with a TOD deed. And since you are incapacitated, you are unable to revoke the deed and name someone else, such as your granddaughter, instead.
With a TOD deed, you are the only one in charge — which is generally a plus. Upon your incapacity, however, your lone authority can present a challenge. If you have a living trust and you develop Alzheimer’s, then you may need to move to a memory care facility. Unfortunately, those institutions are quite expensive. A living trust allows your Successor Trustee to sell your home and use the funds to pay to your care. Again, this option is simply not available with the TOD deed.
Con #4: Beneficiary Held Liable for Debts and to Creditors
The TOD offers no protection from creditors. This means that if your debts are larger than the value of the property, your beneficiary can end up with zero. Additionally, your beneficiary may not be able to sell or receive the property in his/her name until three years after your death. The reason is that some title companies are not willing to issue title insurance for a TOD deed if there are unsatisfied creditor’s claims against the property.
Finally, your beneficiary can be held liable for all unsecured debts, such as mortgages and taxes.
In summary, a TOD deed, like any other method of Estate Planning, has its advantages and disadvantages. Whether or not it’s the right approach for you depends on the simplicity of your estate, urgency of your situation and much more. Since every individual’s situation is different, it’s important to discuss your unique circumstances with an Estate Planning attorney who can help customize your plan of action to fit your needs and goals.
Staci Yamashita-Iida, Esq. is an estate planning attorney at Elder Law Services of California. She can be contacted at (310) 348-2995. The opinions expressed in this article are the author’s own and do not necessarily reflect the view of the Pacific Citizen or JACL. The information presented does not constitute legal advice and should not be treated as such. Some names and identifying details have been changed to protect the privacy of the individuals referenced in this article.
