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Another Day, Another Deed: California creates new Transfer on Death Deeds

Starting this year there is yet another way to pass property by avoiding probate: Transfer on death deeds. Transferring real property without having to go through probate sounds great, but there are a few strings attached.

In the past, people have commonly used joint tenancy deeds to pass real property without having to go through probate. The problem is that a joint tenant on real property is considered a part owner of that property during lifetime. That means if you add a child to your deed as a joint tenant, you cannot sell or refinance the property without their signature. It technically is a gift during life and subject to gift tax reporting. It also means that the one child on title, and ONLY that one child, will receive total ownership of the property after you are gone.

To fix these issues, California instituted a new device referred to as the Transfer-on-Death Deeds (“TOD Deeds” for short). With a TOD Deed you can name your intended beneficiaries for your real property, but the named beneficiaries do NOT receive any ownership rights while you are alive. At death the property passes outside of probate to your named beneficiaries.

There are a few rules you have to follow, however, to properly use a TOD Deed. First, these types of deeds only apply to three classes of real property: (1) residential property with one to four units; (2) condos; and (3) agricultural property of forty acres or less that have at least one house built on it.

In other words, TOD Deeds cannot be used for commercial property, apartment buildings that exceed four units, vacant land of any type, or large tracts of agricultural property in excess of forty acres. The TOD Deed was really meant to apply to a single home, and that is what the law is trying to focus on with this limitation.

Also, TOD Deeds must be in writing, signed by the property owner, notarized, and recorded with the county recorder within sixty days of signing it. Those are fairly tricky rules and missing any one of them can cause the TOD Deed to be invalid.

Wait, there’s more: the TOD Deed must also name specific beneficiaries. Saying something like “my children” is not good enough to name your beneficiaries under a TOD Deed. Instead, you must specifically list each person’s name on the TOD Deed. Failing to do so will make the TOD Deed invalid.

The upside of a TOD Deed is that (1) it is revocable so you can change it at any time you like, and (2) it provides no current ownership rights to the named beneficiaries. That means you can continue to own, enjoy, finance or even sell your home without having to get the consent or signature of a named TOD Deed beneficiary. That is a big improvement over joint tenancy where a current ownership interest is being created as soon as real property is titled as joint tenants.

In a perfect world where people fully understand the rights they are creating using a TOD Deed, these can be great tools for estate planning. But in a not so perfect world such as ours, problems can arise…that’s the subject of our next post on TOD Deeds.