If your trusted estate planning professional recommended a Transfer on Death deed for your purposes, it might be the right thing to do. However, get this wrong, and you could have a tough time. “So what? I’ll be dead,” you might be thinking. However, your heirs will undoubtedly have to deal with the fallout. You could even end up losing your property long before you are deceased! A People’s Choice can prepare a Transfer on Death Deed if a customer absolutely demands this document. With this in mind, however, the pitfalls of California’s Transfer on Death Deed outweigh the fragile benefits. As a result, short of executing a Transfer on Death deed in an emergency, it’s not a solution we recommend nor promote as an estate planning tool.
How California’s Transfer on Death Deed Works
When you file a Transfer on Death Deed with the county, you create an “early bird” scenario for your beneficiary(ies). When you die, the property can automatically transfer to that beneficiary. This can save a great deal of time and money for your grieving loved one.
California’s Transfer on Death Deeds will not work for many properties. In fact, you can use this strategy only if you are creating a deed for:
- a single-family home
- a condo unit
- farms of no more than 40 acres
- multi-unit buildings with no more than four units
Weak Points of the Transfer on Death Deed
Users pay for the simplicity of the Transfer on Death Deed. There are many things that you give up when you use this inheritance strategy. The deed becomes invalid if the named beneficiary dies before the property owner. There are no contingent beneficiaries, so it is relatively easy to invalidate a Transfer on Death Deed in these situations.
Transfer on Death Deeds also prevent management, sale, and borrowing against the property if the owner becomes incapacitated. For example, if a property is held in a living trust, the beneficiary could leverage that property to pay for long-term care for the owner. Transfer on Death Deeds do not permit this.
Children may be beneficiaries of this type of deed, but they cannot manage nor transfer the property until they turn 18. However, this type of deed does not allow the property owner to designate a custodian. As a result, when the owner dies, the court must appoint a custodian. This can be an expensive process that is needless in other scenarios. For example, in a living trust, the property owner names the custodian when the trust is created.
California’s Transfer on Death Deeds offer essentially no protection from creditors. Consequently, this leaves a beneficiary liable for the decedent’s unpaid debts. Oddly, insurance title policies are void once the deed is recorded. Further complicating matters, many title insurance companies will not issue title insurance on real property transferred using this method. They require a three-year waiting period. That means a beneficiary must hold the property for three years without selling it or borrowing against it.
This New Law Has Many Pitfalls
California’s Transfer on Death Deeds are relatively new. As a result, there is very little case law to guide the courts when a problem arises. These deeds are so easy to draft and record. Some legal experts fear they will make it very easy to take advantage of the elderly. At present, it is unclear how courts will establish undue influence and resolve it in this type of scenario.
As mentioned above, under California code, a beneficiary who inherits real property through a transfer on death deed is personally held liable for all of the deceased person’s debts, even if the debts had nothing to do with the property! This is alarming and should be the biggest deterrent to using the TOD as an estate planning tool. Because of this issue, title companies have been reluctant to issue title policies for any property that has been transferred under a Transfer on Death deed.
What does this mean? First, this means that the beneficiary will not be able to sell the real property for at least three years. Generally speaking, no one will want to purchase the real property if they cannot get a title insurance policy. Secondly, since title companies have shown an unwillingness to insure the home during these three years, the real property becomes unmarketable for the three years following the decedent’s death.
Equally important, if the real property owner creates a Transfer on Death deed and later becomes incapacitated, it is impossible to change the deed. This can create other problems if a beneficiary dies or there are changes in the family.
Finally, if California’s legislature doesn’t renew this law, the law will automatically terminate in 2021. That’s not far away. What happens if this statute is no longer valid law in California? Would all beneficiary deeds created and recorded before 2021 automatically become invalid? No one really knows, and it is certainly a risk many would not want to take.
The Risks of Simplicity
The simplicity of this type of transfer makes it very attractive to many people. Simplicity is great, and you can also avoid probate! Although this may be true, with simplicity comes many risks. In reality, there are few situations in which a Transfer on Death Deed will help you accomplish your goals. If you are debt-free, have only one property, and own few other possessions, it might work for you. However, your beneficiary must be able to hold that property three years before selling at least. If you meet all these requirements, there are still many unknowns with this type of transfer.
Contact A People’s Choice to discuss other estate planning options that don’t break the bank. Many other low-cost options in California can help you avoid probate, keep your costs down, and accomplish your estate-planning goals. We can help you prepare the necessary estate planning options to put your plan into action. Call us today at 805-648-5540.
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