Imagine an estate situation that's common enough: An elderly California husband, father and stepfather, suffering with dementia, did not have a Will or Estate Plan in place. Because he required too much care to continue to live at home, the elder's wife moved him into a Sausalito assisted living facility. Family members regularly visited the elder. The elder's wife would generally avoid visiting her husband if his children by his first marriage were on the assisted living premises. Classic strains between the stepmother and the stepchildren were palpable. The stepmother had no children of her own, and she was just ten years older than her husband's oldest child.
A few of the elder's children, knowing their share of their father's estate likely to be limited because of the stepmother, came up with a "beneficiary enhancement" plan. Why not use California's new revocable transfer upon death deed ("TOD") to have their father make a transfer of his interest in the couple's San Francisco home to the children of his first marriage? Upon hearing of the plan, the oldest son used SNL's Tommy Flanagan's line, "Yeah! That's the ticket." Not to be outdone in enthusiasm, the youngest son exclaimed, "Party On!" So let's talk about a few problems that may accompany that ticket.
To start with, let's state the obvious. California's new transfer on death deed statute is just that - new. It has not yet been tested, and it, like many new laws, may raise more questions than it answers. Whatever questions or answers the statute raises, it is repealed effective January 21, 2021 unless a new statute extends that date. The next five years will test whether the law's impact will be "no harm, no foul," or "what were we thinking?" We will see. For now the statute does lay out a set of rules that may be followed. The essential rules:
- A California "Revocable Transfer on Death Deed" allows Californians to sign a deed transferring real property to another individual upon their death. The deed is revocable until the transferor's death.
- Property eligible for the TOD deed includes (1) real property improved with not less than one nor more than four residential dwelling units, (2) a condominium unit, and (3) a single tract of agricultural land consisting of forty acres or less that is improved with a single family house.
- The deed must be "substantially" in the form provided by Probate Code Section 5642. It must be signed and notarized. The transferor must identify the beneficiaries by name.
- Upon the death of the transferor the TOD deed transfers all of the transferor's interest in the real property to the beneficiary. Where there are multiple beneficiaries, the beneficiaries take the property as tenants in common, in equal shares. A beneficiary cannot take if he or she does not survive the transferor.
There are a number of other provisions and formalities associated with the statute that can be readily accessed online. For a beneficiary, a TOD deed might well be a House of Cards. Here are the factors from a probate litigation attorney's perspective:
- The transferor may execute a TOD deed if he has capacity to contract. This issue of capacity is somewhat murky as it is a higher standard than testamentary capacity (capacity to make a Will).
- A spouse who does not join in or consent to a TOD deed executed by the other spouse does not lose any rights in the property. A surviving spouse can set aside a transfer of community property under a TOD deed if she never joined in or consented to the TOD deed.
- Real property subject to a TOD deed remains subject to the claims of the transferor's creditors. The beneficiary of a TOD deed is personally liable to the transferor's estate and the transferor's creditors.
- The personal representative of the transferor's estate may demand "restitution" from a TOD deed beneficiary. This demand may occur as late as three years after the decedent's death.
In the San Francisco house case referenced above, the children, as beneficiaries of their father's TOD deed, might find themselves in Court answering questions as to their father's capacity; their undue influence on their father; his dementia vulnerability; the secrecy surrounding the TOD deed; the lack of the spouse's consent; and a clawback of their beneficial interest back into the estate to pay creditors (possibly even the estate administration expenses owed to the stepmother and the estate's attorney's fees).
The analysis above presents a cautionary tale. In the field of estate, trust and probate litigation, we see real cases family and business conflict - cases that dwarf this cautionary tale in complexity and size. The one thing to remember with TOD deeds: one size does not fit all.