Effective January 1, 2016, those owning California real property may use the new "Transfer on Death Deed" ("TODD") to pass property to a beneficiary upon the property owner's death. I recently attended an educational course on the TODD and let me tell you, this thing scares me. The California legislature, in passing this law, was altruistically attempting to provide a less expensive vehicle than a living trust for property owners to pass property free of probate at death. I support that effort wholeheartedly, however, given the infancy of the law and the lack of settled case law to help interpret its provisions, a living trust remains far superior to the TODD alternative.
Advantages of the TODD
The Cost: drafting and executing a TODD is significantly less expensive than establishing a living trust. Typically, preparation of a deed will cost only $300 to $400, plus the recording fee.
Power to Revoke: The property owner may revoke the TODD after recording it. Upon revocation, title would revert to how it was held before filing the TODD. If the property owner changes his or her mind about to whom the property should transfer at his or her death, revoking the deed or filing a new TODD with a different beneficiary is an option.
Believe it or not, those are the only advantages I see to using the TODD. Let's take a look at why.
Disadvantages of the TODD
The TODD legislation is booby trapped with land mines of potential problems and litigation. Here are just a few of them:
No Conditional/Contingent Transfer: There is no way to make the transfer of the property conditional. In other words, you cannot restrict the transfer based on the age of the beneficiary, you cannot create a life estate in the property, and most importantly, you cannot name a contingent beneficiary if the primary beneficiary were to predecease the owner. If the beneficiary of the TODD were to pass away before the owner, the owner would be left in a scramble to create and record a new TODD before death. All of the above deficiencies of the TODD can be overcome with a living trust.
Executor's Restitution Demand: Potentially the most problematic issue with a TODD is the authority of the executor of the owner's estate to demand return of the property to the estate. This is called the "Restitution Demand." The executor's restitution demand right lasts for three years from the date of the owner's death. Three years! Accordingly, if the owner dies with debts or taxes or expenses owed that cannot be satisfied with other assets, the executor can, for three years after the death, demand return of the property to the estate to satisfy those obligations. Now, if the beneficiary had moved in to the property, improved it, or simply made it their home, the restitution demand could force the beneficiary to vacate and return any income earned from the property since it was transferred. The beneficiary could not feel settled and vested with full ownership until this period passed. Moreover, if the beneficiary sold the property within the three year period and the executor made the restitution demand after the sale, the beneficiary would be liable to return all proceeds from the sale to the executor. This disadvantage considered alone is reason to avoid using the TODD and could prevent familial issues, especially with blended families.
Beneficiary's Personal Liability: Typically, unless stated otherwise in a property owner's trust or will, a beneficiary will inherit property subject to the existing debts secured by the property. For example, a daughter may inherit her parents' residence subject to the existing mortgage. However, the daughter would not become personally liable for that mortgage if she defaulted in the future. With the TODD, that is NOT the case. The beneficiary of the TODD not only accepts ownership subject to the existing encumbrances, but also becomes personally liable for those debts in the event of default. This, along with the restitution demand, pose significant risks if the owner is not certain that the owner's beneficiary can afford to maintain the property at the time of the owner's death.
Equal Shares for Multiple Beneficiaries: If you intend to transfer the property to more than one beneficiary at death, you must provide each beneficiary an equal share in the property. This may be an issue if there are not sufficient other assets in the owner's estate to provide a more significant gift to one beneficiary. For instance, maybe the owner lent money to one of his children during his life, so he wanted to compensate his other child with more assets when he passed to equate the gifts. The owner cannot do this with the TODD.
No Class Gifts: Another negative of the TODD is the inability to name a class beneficiary. For instance, if a young couple only has one child now but intends to have more in the future, they cannot use the TODD to name their "living children" as beneficiaries. Another example is a grandmother who is not sure of the number of grandkids she may have at her death. She cannot name "all grandchildren then living" as her beneficiary in the TODD. As a result, there is significantly less flexibility in using the TODD than a living trust.
THE RUB: This law, intended to simplify the transfer of real property to a beneficiary without using a living trust, is rife with potential claims, lawsuits, court costs, and attorney fees. Balance these potential problems against the cost of a living trust which transfers real property without these legal ramifications and allows for a multitude of flexible transfer arrangements, and the TODD may end up costing much, much more than a trust. Simply put, a living trust reigns supreme, so use it.