On September 23, 2015, Governor Brown signed AB 139, a bill introduced by Assemblyman Mike Gatto, which allows Californians to take advantage of a new, low-cost way to avoid probate on residential real property – the revocable transfer on death deed (RTDD). With AB 139, codified at California Probate Code section 5600, et seq., California has joined more than 20 other states offering this tool, for at least five years – since unless it is extended, the new law will expire January 1, 2021.
An RTDD basically allows a transferor, who has the capacity to contract, to deed his or her property (limited to a condominium, property comprised of one to four residential units, or 40 acres or less of agricultural land improved with a single-family residence) to a chosen beneficiary upon death, bypassing the often costly, time-consuming process of probate. The RTDD would work like the payable-upon-death forms already used to pass on assets like insurance policies, bank and brokerage accounts or IRAs, without going through probate.
The RTDD must be substantially similar to the statutory form described in Probate Code section 5642, subdivisions. (a) and (b), and must be signed, dated, notarized, and recorded within sixty (60) days of signing to be valid. If recorded and not revoked, the RTDD will be effective upon death to transfer the property to the named beneficiary. Inasmuch as this would represent a revocable transfer, the transferor can always change his or her mind and either name a new beneficiary or simply revoke the prior transfer. The property transferred via the RTDD would remain in the transferor’s estate, including for Medi-Cal eligibility and for the transferor’s creditors. Because the transfer does not occur until the grantor’s death, there is no completed gift for purposes of gift tax. And there is no documentary transfer tax payable or Proposition 13 reassessment at the time of recording the new RTDD.
While advocated as a convenient and inexpensive way for a non-probate transfer of a residence, there are concerns that the availability of this simple transfer deed raises concerns regarding the risk of fraud, incompetency, and duress in the making of RTDDs by elderly and vulnerable users. Also, since the RTDD option is only effective for transfers of residential real estate and does not include other types of real property and other assets that would still be subject to probate, such as non-residential real property (industrial, large ag, etc.), cars and personal property like jewelry, many commentators find the device too limited in scope and flexibility. Finally, if the property is held as community property with right of survivorship and the transferor is the first joint tenant or spouse to die, the RTDD is ineffective.
RTDDs may also create difficulties for title insurers. Unlike probate, which transfers the decedent’s real property only after creditors have been paid and there is a clear determination of who owns the property, RTDDs convey real estate immediately upon death—even though claims against the property may subsequently be filed by the decedent’s creditors. Therefore, until the applicable claims period has expired, it is difficult for a company to issue title insurance on the conveyed property. According to a recent newspaper article, “At least one national title insurance company’s underwriting policy requires an in-depth factual investigation and senior underwriting review and approval to issue a new owner’s policy of title insurance following the death of a revocable TOD deed grantor.” (Barnes, Usefulness of TOD Deeds Uncertain, S. F. Daily Journal (January 5, 2016).) Once attorneys, creditors and title companies become more familiar with RTDDs, any wariness about them may lessen, but until then, we can only wait and see.
While the new RTDD holds much promise as a way of simplifying transfer of a home upon the owners’ death, it is not suitable for everyone, and may end up being a fairly limited means of assuring an intended post-death conveyance. If a grantor wants to leave property in trust, or wants to plan to reduce estate taxes, or wants to make sure that a trusted person can maintain or sell the property during the grantor’s incapacity, an RTDD is not the proper means of doing so and, at the end of the day, is not a substitute for a complete Estate Plan – a Will, Trust, Advance Health Care Directive and/or Power of Attorney. Before deciding upon the use of an RTDD, it is strongly recommended that individuals seek professional guidance from an elder law or estate planning attorney.