LEGAL READ: Revocable Transfer on Death Deed

NTRO: After many attempts during recent years, the California legislature passed, and the governor signed, an interesting bill – AB139. This blog post will discuss that law, effective January 1, 2016, and its merits.

AB139 makes available a new kind of deed, called a “revocable transfer on death deed”, that enables an individual real property owner to designate a grantee who will, on the owner’s death, become the legal owner of the property. Furthermore, no court probate proceeding will be required.

I’ve often written about the many disadvantages of probate, which include significant attorneys’ fees, costs and inconvenience. This legislation was an attempt to create a consumer-friendly way for individuals (not couples) to transfer real estate to a loved one simply, without needing to hire an attorney to draft a Will and/or a Revocable Living Trust.

Until enactment of this new law, no methods have been available to enable a non-probate transfer on death of real estate owned by an individual. While one has always been able to deed/transfer a “joint tenancy” interest in a property to a loved one, this can cause serious problems, including that: a) the owner exposes her equity in the property to the creditors of the added joint tenant (co-owner); b) the joint tenant loved one could force the sale of the property and take half of the sale proceeds!; and c) the future sale by the loved one can potentially result in substantial income tax liability that would not have been triggered if the loved one had instead received the property on the owner’s death by Will or Trust.

The appealing part of this new law is that since the property transfer is effective only upon the owner’s death, the above disadvantages do not exist. So, does the new law mean that Wills and Trusts are no longer necessary or desirable or, furthermore, that the need to engage in estate planning has gone away? Definitively, “no!” Is this new method of transferring real estate on death by deed a magic bullet? Again, a resounding “no”.

While it can be useful in certain, limited circumstances, the revocable transfer on death deed has important limitations and potential problems. First, it creates a relatively easy way for a predator to take advantage of an elderly property owner by persuading the elder to sign such a deed. The law contains some protections against such abuse, but the protections are certainly not foolproof. This type of fraud could cause a huge problem and be difficult and expensive to try to remedy. If an elderly owner instead engages in more conventional estate planning – such as working with an attorney to establish a comprehensive estate plan, including a Revocable Living Trust – this potential fraud damage is avoided.

Another critical limitation is that, unlike a Trust, this simple deed is not suitable if an owner wishes to add appropriate or necessary conditions. If the desired grantee is a minor or young adult, or the owner might prefer that the distribution be delayed or controlled rather than given to the grantee outright (i.e. with no “strings attached”), and thus using this new kind of deed would be unwise. Instead, a Trust, prepared and executed with proper legal formalities, can create meaningful control and protection, including probate avoidance, for such loved one.

What happens if the named grantee in the deed dies before the property owner dies? This question leads to the most fundamental shortcoming of the new law. Let’s suppose, for example, that the grantee dies and the owner is then incapacitated or unable to revoke the deed prior to her death. In that event, if the owner had no valid Will, the real estate would go to the owner’s next of kin. That applicable “intestacy” statute could result in the real estate being distributed to a blood relative whom the owner would have never wanted to inherit her property. Typically, this is not a problem for people who establish a Living Trust (or a Will) because they routinely designate one or more contingent beneficiaries. Accordingly, if the primary beneficiary dies before the owner does, the property is alternatively distributed per the owner’s wishes.

The “bottom line” is that this new law, if used when appropriate and after consulting with legal counsel, can be helpful; but it is only one limited tool, among many, that might be useful in any particular estate plan.

This article is intended to provide information of a general nature, and should not be relied upon as legal, tax, financial and/or business advice. Readers should obtain and rely upon specific advice only from their own qualified professional advisors. This communication is not intended or written to be used, for the purpose of: i) avoiding penalties under the Internal Revenue Code; or ii) promoting, marketing, or recommending to another party any matters addressed herein.

Mr. Silverman is an attorney with R. Silverman Law Group, 1855 Olympic Blvd., Suite 125, Walnut Creek, CA 94596; (925) 705-4474; rsilverman@rsilvermanlaw.com.

ESTATE & TRUST ADMINISTRATION: Need to find an experienced estate & trust administrator in Walnut Creek CA? Contact Robert Silverman at 925-705-4474 for legal advice on a Revocable Living Trust, “Summary” Estate Administration, Trust/Estate Beneficiary Representation and Will & Trust Disputes.