California passed a new law, effective in January 2016, which allows the owner of real property to designate a beneficiary to receive their real property when the owner passes away. This new real property transfer device is called a transfer of death deed (“TODD”). A transfer of death deed can be a very good way for the owner of real property to transfer the property to another individual without the need of a last will or living trust. It is also an easy and inexpensive way for an owner of real property to transfer the property after he or she passes away. While the transfer of death deed has certain advantages, there are significant deficiencies in using this method to transfer real property and it is not a good substitute for proper and complete estate planning.

Transfer on Death Deed (TODD) and Joint Tenancy with Right of Survivorship

It should also be noted that a transfer on death deed (TODD) is NOT the same as owning property with someone in joint tenancy with right of survivorship (JTWROS) or adding a new Joint Tenant to your existing real property to avoid probate. While JTWROS usually does avoid probate, most estate planning attorneys agree that using a JTWROS as an estate planning mechanism has significant drawbacks.

A joint tenancy with right of survivorship (JTWROS) deed is not appropriate for everyone and naming your children or another individual as joint tenant on your existing deed to real property can be a very bad idea for the following reasons:

  • The other joint tenant owns part of your property (you give up part ownership in your property)
  • The other joint tenant can keep the property for themselves after you pass away, even if you planned for them to share it with other family members
  • You need their permission to sell it or transfer it to someone else
  • You need them to agree & sign for any loans against the property, including a reverse mortgage
  • You cannot undo the transfer unless they gift the real property back to you
  • There may be a gift tax implication (see your CPA for more information on gift taxes)
  • Your property is subject to the creditors of the other joint tenant
  • If all other joint tenants on the deed pass away before you, then the property will have to be probated in court. In California, probate is a very tedious, expensive, and long process.
  • Any joint tenant can “sever” the right of survivorship, causing their share of the property to pass to someone other than the joint tenants named on the deed
  • The JTWROS deed will control how your property passes when you die, not your last will or living trust (unless you are the last surviving owner)

How Transfer on Death Deed differs from Joint Tenancy with Right of Survivorship

The new transfer on death deed differs from joint tenancy with right of survivorship, but may not be the best estate planning choice for you and your loved ones. While the transfer on death deed addresses some of the risks of using a joint tenancy with right of survivorship deed, it is fraught with peril.

The biggest difference between a JTWROS deed and a TODD is that the TODD does not pass a current ownership interest to the intended beneficiary. This is a big difference.

Advantages of the Transfer on Death Deed over the Joint Tenancy with right of survivorship include:

  • No ownership interest is transferred until you pass away, so no permission is needed to sell the property, change the gift, or get a loan
  • No additional tax filing is necessary
  • Creditors of the beneficiary cannot reach your property for collection purposes
  • You can change the name of the beneficiary of your property at any time before you pass away or are incapacitated
  • The named beneficiary does not need to be informed of the gift until after you pass away

Before you file your transfer on death deed (TODD), you need to be aware that there are technical requirements that can create problems on the recording side and on the transfer side if the TODD is not properly prepared, filed & recorded.

Important Transfer on Death Deed (TODD) Points

Here are some very important points to be aware of before you use the TODD (and reasons why the TODD may not be right for you and your loved ones):

  • You must name specific beneficiaries to inherit the property and cannot just state “my children,” or “any grandchildren” (you have to use specific names)
  • If a named beneficiary passes before you, the gift will not pass to that person’s children (as it likely does through a trust or will) and instead the property will pass to the other people named as beneficiaries
  • If all named beneficiaries pass before you, then the gift will cancel and the property will have to be probated in court, which is a very tedious, expensive, and long process.
  • The TODD must be recorded within 60 days of preparing the deed and if you wait longer than that, the deed is void
  • The TODD can only be amended or voided by filing and recording a new TODD or a formal revocation of the old TODD (providing for a different gift of your property in your will or trust will not revoke a TODD)
  • A TODD cannot be used for commercial property or vacant land
  • A TODD can only be used for residential property having one to four dwelling units, or up to 40 acres of farmland with a dwelling unit on the property

In many cases using a transfer on death deed (TODD) to transfer your real property is not the best choice for proper and complete estate planning. Even if you choose to use a TODD to transfer your real property, you still need a last will, durable power of attorney and advance health care directive (and you may still need a revocable living trust).

You should have a last will if any of the following apply to you:

  • If a child who is a beneficiary passes before you and you want his/her share to pass to their children (your grandchildren)
  • You have more than one beneficiary and you want the real property to pass in unequal shares
  • You have a JTWROS deed with your spouse, but want to plan for the possibility that you and your spouse may die together
  • You have commercial property or vacant land
  • You do not want the State or Court to decide who inherits your property if all beneficiaries named on the TODD pass before you

A revocable living trust is often the best answer.

There are many advantages to setting up a trust.
You should have a revocable living trust if any of the following apply to you:

  • Protect irresponsible beneficiaries from inheriting your assets outright (set up a “trust fund” so they only get a stream of income, not the entire gift all at once)
  • Protect beneficiaries from losing their inheritance to creditors or a divorcing spouse
  • Provide for management of your real property during your incapacity (TODD does not provide for this)
  • Avoid probate (if the named beneficiaries on your TODD do not survive you the property will go through probate)
  • Protect your real property from going to your spouse’s new mate if you pass away first
  • You can amend your trust and designate new beneficiaries to your property without having to record new documents with the County Recorder’s office
  • Direct that real property be sold and the proceeds divided between specific beneficiaries, which can include charities
  • Direct that real property be held in trust for family members and provide specific instructions directing how the property should be used and how expenses should be paid
  • Direct real property be held in trust for the benefit of minor children, then designate it goes to someone else once they are grown
  • Restrict the use of an inheritance for a specific purpose (such as for education only)
  • Planning for a beneficiary with special needs (setting up a Special Needs Trust)
  • Planning for the care of pets (setting up a Pet Trust)

While there are certain benefits to utilizing the new transfer on death deed (TODD), this a new process with potential problems if not handled correctly, so be sure to talk to an experienced estate planning attorney before you prepare and file a TODD. And if you decide to use the TODD, make sure you have also prepared other estate planning documents, like your last will, durable power of attorney and advance health care directive – and possibly a revocable living trust). Taking the time now to make sure you have established the best estate plan for you will protect your assets and make it much easier for your loved ones in the future.