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As of January 1, 2016, there is a new estate planning tool available to residents in California. It’s called a “transfer on death”, or TOD deed. The TOD deed allows owners of certain residential real property to name one or more beneficiaries to receive title to the property upon death, thus avoiding the need to probate the estate.
Let’s take a look at the TOD deeds and identify some of its pros and cons. Before the TOD deed, the most common way to transfer real property in California upon death is by joint tenancy or through probating the owners will in court, a lengthy legal and expensive process. Californians may also establish revocable trusts to avoid the probate process, but trusts can be too expensive for seniors and individuals whose estate consists primarily of the family home. A TOD Deed is a fairly simple and inexpensive transfer mechanism to be used in certain simple, straightforward situations.
TOD deeds are limited to one to four residential dwelling units, condominium units, or not more than 40 acres of agricultural land with a single-family residence. A revocable TOD deed is not effective unless the owner signs and dates the deed before a notary public. The deed does not need to be delivered to the beneficiary. The deed must be recorded 60 days or less from the time it is signed. Finally, the deed may be revoked by the transferor at any time.
The benefits of TOD deeds include simplicity, low cost, passing property to the beneficiary(ies) at the fair market value (“stepped up basis”) upon the death of the owner. It is revocable prior to the incapacity or death if the owner, and in many cases it is a better alternative to transferring title to beneficiaries and retaining a life estate in the home.
Some drawbacks of TOD deeds include lack of contingency planning if beneficiary predeceases the property owner, and if the named beneficiary becomes incapacitated, the TOD gift may disqualify him/her for SSI/Medi-Cal benefits based on economic need. TOD deeds are also very difficult to revoke if owner becomes incapacitated, and selling the house upon the death of the owner may take 120 days or more before title insurance can be issued. Finally, if there is more than $150,000 in additional asset value beyond the house, the estate may still have to go through probate to transfer those assets.
When I think of suggesting a TOD to a client, it’s typically a single or surviving parent whose estate consists of a house and little else, and wants to leave his or her residence outright to one or more children whose circumstances do not necessitate the protection of a further trust. The TOD deed is intended for this simple situation and is a simple and inexpensive method of avoiding probate.