Transfer on Death Deeds

As of January 1, 2016, a revocable Transfer on Death (TOD) deed may be used to make donative transfers of real property to named beneficiaries. The revocable TOD deed helps individuals transfer property without the need for probate. This powerful tool can assist those looking to pass real property outside of probate without the use of a trust. However, these deeds come with some drawbacks. 

How does a transfer on death deed work in California?

A revocable TOD deed can be used for:

• Real property with one to four residential dwelling units;
• A condominium unit; or;
• A parcel of agriculture real estate of 40 acres or less that is improved with a single-family residence.

The revocable TOD deed is prepared by including the property’s legal description and the named beneficiaries of the property owner. The deed is then recorded in the county where the property is situated. Upon the owner’s death, the property will be transferred to the named beneficiaries. Prior to the property owner’s death, the deed may be revoked at any time.

The statutes authorizing transfers by revocable TOD deeds are set to expire on January 1, 2032. However, any revocable TOD that is executed prior to the expiration date will remain valid.

Advantages of a TOD deeds:

The main advantage of revocable TOD deed is the ability to transfer real property outside of probate without the need for a trust. These deeds are much simpler to prepare than a revocable living trust, and effectively transfer property outside the purview of the probate court. Further, these deeds are revocable, so they may be revoked and replaced if a change of circumstance necessitates. 

Transfer on Death (TOD) deeds offer a simple and efficient way to transfer property ownership outside of probate. 

Here are 5 key advantages to consider:

1. Probate Avoidance:

Probate can be a lengthy and expensive process. TOD deeds allow your property to pass directly to named beneficiaries, avoiding the hassle and cost of probate court. This can save your loved ones time, money, and stress during an already difficult time.

2. Simplicity and Cost-Effectiveness:

Compared to creating a trust or will, TOD deeds are much simpler and more affordable. You can typically prepare and record a TOD deed yourself without needing the help of an attorney. This can save you a significant amount of money compared to other estate planning options.

3. Maintain Control:

You retain full ownership and control of the property until your death. You can live in, rent out, or sell the property as you wish. You can also change the beneficiaries or revoke the deed at any time.

4. Privacy:

Unlike wills, which become public record after your death, TOD deeds are not publicly accessible. This can provide some privacy for your beneficiaries and the details of your estate.

5. Flexibility for Specific Property Types:

TOD deeds can be used for a variety of property types, including single-family homes, condominiums, and even some agricultural land. This makes them a versatile tool for estate planning.

What are the disadvantages of a transfer on death deed?

While Transfer on Death (TOD) deeds offer a simple and cost-effective solution for avoiding probate, it’s essential to understand their limitations, and potential disadvantages before relying on them solely for your estate planning. Here are some key drawbacks to consider:

Limited Beneficiary Options:

• No protection for predeceased beneficiaries: If your named beneficiary dies before you, the TOD deed becomes invalid, and the property reverts to probate. Consider a trust to name contingent beneficiaries and ensure your chosen heir receives the property.
• Challenges with complex family dynamics: TOD deeds can be inflexible when dealing with divorce, separation, or blended families. A trust offers more control and flexibility to distribute assets fairly in such situations.

Tax Implications:

• Potential capital gains tax for beneficiaries: Although TOD deeds avoid probate, beneficiaries may still face capital gains tax on the property’s increased value since your purchase. Consult a tax advisor to understand potential tax liabilities.
• No control over basis step-up: Unlike trusts, TOD deeds don’t automatically adjust the property’s tax basis to its market value at your death. This could lead to higher capital gains tax for beneficiaries down the line.

Other Considerations:

• Limited property types: TOD deeds are only valid for specific property types, like single-family homes or condominiums. They cannot be used for commercial buildings or property with multiple residences.
• Risk of fraud or forgery: Like any legal document, TOD deeds can be vulnerable to fraud or forgery if not handled properly. Ensure secure storage and consider witness requirements for added protection.
• Estate planning limitations: TOD deeds may not provide the necessary flexibility for complex estates or specific wishes for property distribution. A will or trust might be more suitable in such cases.

Remember: While TOD deeds offer a convenient way to transfer property outside of probate, their limitations can have significant consequences. Weighing the pros and cons carefully alongside professional guidance from an attorney or financial advisor is crucial for making informed estate planning decisions.

California TOD deeds can provide a cost-effective alternative to transfer real property outside of probate. However, they provide only the bare minimum from an estate planning perspective. If possible, it is always wise to invest in more advanced estate planning techniques to ensure there are no hold ups in the administration of the estate.