Estate planning attorneys likely have encountered the following scenario: a single client contacts you to set up an estate plan. He wants to ensure that his main asset—his personal residence—will pass to his children upon death without the need for a costly and time-consuming probate proceeding, but he does not want to spend a lot of money. As his attorney, you run through the potential nonprobate transfer devices that might be available to him. One option you consider is creating a revocable living trust, but this option is likely too expensive for your cost-conscious client and a bit excessive for such a small estate. You also consider recommending a transfer of the property into a joint tenancy, but realize that it would raise too many issues—the children would obtain immediate ownership rights and could sever the joint tenancy, and the gift would be irrevocable and not subject to change by the transferor. You also have heard of a revocable deed, sometimes referred to as a Tennant Deed, which allows a grantor to grant real property to a beneficiary subject to a life estate in the grantor, with a reserved power of revocation,1 but you do not know much about revocable deeds and are hesitant to advise your client to create one based on a case decided 100 years ago.
As the above hypothetical illustrates, existing California law failed to provide low-income and elderly homeowners with a simple, cost-effective nonprobate transfer device to transfer their homes to their loved ones at death. So, in 2005, the California legislature authorized the California Law Revision Commission ("CLRC") to study the effect of existing California nonprobate transfer provisions and to study other states that allow revocable transfer on death deeds (revocable Transfer on Death deeds, or beneficiary deeds) as a way to convey real property at death.2 The purpose of the study was to determine whether the legislature should authorize the use of revocable TOD deeds in California.
In October 2006, the CLRC issued its findings and recommendations regarding the use of revocable TOD deeds in California. After looking at existing nonprobate transfer devices in California,3 the CLRC found that the revocable TOD offered the following advantages: 1) it would be cheaper and quicker than existing nonprobate transfer devices; 2) it would be fully revocable by the transferor; 3) it would protect the property from the beneficiary's creditor claims during transferor's life; 4) it would prevent potential gift tax liability; and 5) it would not impact the transferor's Medi-Cal eligibility.4 The CLRC also raised concerns about the use of revocable TOD deeds, namely that it would facilitate fraud and abuse against the elderly and unsophisticated consumers, or cause the elderly to avoid seeking legal advice, leading to adverse estate planning consequences.5 After weighing the pros and cons, the CLRC concluded that the revocable TOD would be beneficial in California.6
On September 21, 2015—nearly ten years after the CLRC published its initial study and after three failed attempts at passing similar legislation—Assembly Bill No. 139 was signed into law, authorizing the use of revocable TOD deeds in California. While the passage of Assembly Bill No. 139 has been lauded by supporterss as "provid[ing] seniors with a simple, no-cost method to transfer property to their heirs,"7 it has not completely eliminated the concerns raised in the 2006 CLRC initial study.
Nuts and Bolts of Revocable TOD Deeds
Assembly Bill No 139 amends various sections of the Family Code and the Probate Code. The primary statutory scheme governing revocable TOD deeds will be found in Probate Code section 5600 et seq. The outline set forth below highlights the major components of the new law; however, it is not meant to be an exhaustive review of the entire bill.
The new law only applies to revocable TOD deeds made by a transferor who dies after January 1, 2016.8 A revocable TOD deed, however, may be executed and recorded prior to January 1, 2016.9
The law will terminate on January 1, 2021, unless it is extended before that time.10
A revocable TOD deed is defined as an instrument that:
1) makes a donative transfer of real property to a named beneficiary,
2) operates on the transferor's death, and
3) remains revocable until the transferor's death.11
Real property that is eligible to be transferred via a revocable TODs include: one- to four-unit residential dwelling units; condominium units; and a single tract of agricultural real estate consisting of 40 acres or less that is improved with a single-family residence.12
Execution of Revocable TOD Deeds
A revocable TOD deed shall be substantially in the same form as the form set forth in Probate Code section 5642.
The owner of the real property must have the capacity to contract in order to execute a revocable TOD deed.13
The transferor must identify the beneficiary by name, not by class gift.14
A revocable TOD deed is not effective until it is signed and dated by the transferor and acknowledged by a notary public.15
A revocable TOD deed must be recorded no later than 60 days after it is executed or else it is not effective.16
Delivery of the revocable TOD deed to the beneficiary during the transferor's lifetime is not required.17
If a second revocable TOD deed is recorded on the same property, the later-recorded deed is the operative instrument.18
When revocable TOD deed is revoked, it does not does not revive an earlier instrument.19
Revocation of Revocable TOD Deeds
A revocable TOD deed may be revoked at any time, provided the transferor still has capacity to contract.20
In order to revoke a revocable TOD deed, the transferor must execute and record the instrument in the same manner as execution and recordation of a revocable TOD deed.21
The transferor is not required to notify or obtain the consent of the beneficiary prior to revocation of a revocable TOD deed.22
Revocation of a revocable TOD deed shall be in substantially the same form as the form set forth in Probate Code section 5644.
Effect of Revocable TOD Deeds
During the life of the transferor, an executed revocable TOD deed does not affect the transferor's ownership rights or create any legal or equitable right in the beneficiary. During the lifetime of the transferor, the property is not available to satisfy the creditors of the beneficiary.23
The beneficiary obtains the interest in the property upon the transferor's death. The beneficiary has the right to disclaim the transfer. If the beneficiary fails to survive the transferor, the interest of that beneficiary lapses.24 If there is more than one beneficiary, the share of the beneficiary that lapses or fails is transferred to the other beneficiaries in equal shares.25
Multiple beneficiaries will take the property as tenants in common, in equal shares.26
Potential Pitfalls of Revocable TOD Deeds
Undoubtedly, this legislation will provide individuals with a simple, cost-effective way to pass property to their beneficiaries without the need for probate proceedings. Despite this, there are traps for the unwary. Because they are relatively straightforward to create, individuals may decide to create a revocable TOD deed on their own without the advice of counsel. This may create problems if the individual has a large and complex estate, or if a revocable TOD deed is not properly executed, recorded, or revoked according the strict requirements of the statute. Further, this law does not eliminate the potential that revocable TOD deeds could be used by unscrupulous individuals to defraud unsophisticated consumers or the elderly. In order to minimize these concerns, the legislature implemented a five-year sunset provision "to help minimize risks of abuse or misuse" associated with revocable TOD deeds, but noted it "would not prevent such risks during the five years that [revocable TOD Deeds] would be valid in California."27 Only time will tell whether revocable TOD deeds live up to their promise as an simple and affordable nonprobate transfer device, or if they prove to be more costly and time-consuming in the long run as a result of litigation generated by the abuse or misuse of this new nonprobate transfer device.
1 See Tennant v.John Tennant Memorial Home (1914) 167 Cal.570.
2 Assem.Bill No.12 (2004-2005 Reg.Sess. ) § 1.
3 The CLRC looked at the following devices: wills, intestate succession, living trust, joint tenancy, community property, gifting, and revocable deeds.The CLRC examined ownership rights, revocability, cost and ease of transmission, privacy, creditors' rights, taxes and Medi-Cal eligibility and reimbursement for each device.(see Recommendation: Revocable Transfer on Death (TOD) Deed (Oct.2006) 36 Cal. L.Revision Comm'n Reports 103 (2006), pp.111-131. )
4 Id.at p.204.
5 Id.at pp.207-209.
6 Recommendation: Revocable Transfer on Death (TOD) Deed (Oct.2006) 36 Cal. L.Revision Comm'n Reports 103 (2006), p.106.
7 Assem.Com.on Judiciary, Analysis of Assem.Bill No, 139 (2014-2015 Reg.Sess. ) as amended March 5, 2015, p.1.
8 Prob.Code § 5600, subd.(a), added by Stats.2015, ch.293, section 17.
10 Prob.Code § 5600, added by Stats.2015, ch.293, section 17.
11 Prob.Code § 5614.added by Stats.2015, ch.293, section 17.
12 Prob.Code, § 5610, added by Stats.2015, ch.293, section 17.
13 Prob.Code, § 5620, added by Stats.2015, ch.293, section 17.
14 Prob.Code, § 5622, added by Stats.2015, ch.293, section 17.
15 Prob.Code, § 5624, added by Stats.2015, ch.293, section 17.
16 Prob.Code, § 5626, subd.(a), added by Stats.2015, ch.293, section 17.
17 Prob.Code, § 5626, subd.(b), added by Stats.2015, ch.293, section 17.
18 Prob.Code, § 5628, subd.(a), added by Stats.2015, ch.293, section 17.
19 Prob.Code, § 5628, subd.(b), added by Stats.2015, ch.293, section 17.
20 Prob.Code, § 5630, added by Stats.2015, ch.293, section 17.
21 Prob.Code, § 5632, subd.(a), added by Stats.2015, ch.293, section 17.
22 Prob.Code, § 5632, subd.(a), added by Stats.2015, ch.293, section 17.
23 Prob.Code, § 5650, added by Stats.2015, ch.293, section 17.
24 Prob.Code, § 5652, added by Stats.2015, ch.293, section 17.
27 Assem.Com.on Judiciary, Analysis of Assem.Bill No, 139 (2014-2015 Reg.Sess. ) as amended March 5, 2015, p.8.