On January 1, 2016, the California legislature enacted Assembly Bill 139, which permits individuals to transfer real property upon death using a revocable transfer-on-death (TOD) deed. Since then, the TOD deed has emerged as an attractive option for homeowners looking for a quick and simple way to transfer property upon death outside of probate court, without establishing a living trust. However, while TOD deeds might seem like an appealing shortcut, there are a number of pitfalls to using these instruments in lieu of more comprehensive planning tools.
Pitfall #1- No Contingent Beneficiaries:
One of the most significant limitations of TOD deeds is that they do not give the homeowner the option to designate a contingent beneficiary. As such, if the named beneficiary predeceases the owner, the property would be subject to probate upon the owner’s death.
Pitfall #2- Liability Issues:
Another downside to transferring property through a TOD deed over a revocable trust is the lack of third-party protection for the beneficiary inheriting the property. Because a TOD transfers property directly to the beneficiary, the property would be subject to attachment by the beneficiary’s creditors. A trust on the other hand could be drafted to include built-in protection for the beneficiary’s inheritance.
Additionally, because a TOD deed is not administered through a trust or probate, the beneficiary is personally liable for the deceased homeowner’s debts for three years, whereas a trust shields the trustee and beneficiaries from the decedent’s creditors.
Pitfall #3- Title Insurance:
Finally, a major disadvantage of TOD deeds is that due to the three-year liability window, title insurance companies will not issue a new policy for three years after the property is inherited. The delay in securing title insurance can hinder the beneficiary’s ability to sell the property, creating undue financial hardship.
Before drafting a TOD deed, it is important to consult with an experienced estate planning attorney to understand your options for transferring your property.
Allyson S. Heller is a licensed attorney at the Law Offices of Tony J. Tyre, ESQ, APC. For more information, please contact our office at (626) 858-9378, or aheller@tyrelawgroup.com.
