Effective January 1, 2016, California AB 139 creates the new Revocable Transfer on Death Deeds (RTODDs). This pilot program, effective until January 1, 2021, gives individuals the power to automatically transfer property on death to a named beneficiary with a simple statutory form. RTODDs are intended to allow property owners to avoid probate, and transfer property at death without significant delay or cost.
At first glance, RTODDs appear to be an attractive substitute for a revocable living trust. They also avoid some of the pitfalls of joint tenancy. People may be asking, why create a full estate plan when a simple deed will suffice? This note explains three reasons why California AB 139 will cause more problems than it solves.
Increases Chance of Elder Abuse and Fraud
Regrettably, elder adults are often financially abused. Due to mental and physician decline, as well as isolation, elder adults become easy targets of caregivers or unscrupulous friends or family members.
Before the new law , elder abusers often went to great lengths to redirect an inheritance. For example, an elder abuser might cause the elder to execute a new trust or will; or steal the property outright. That might have required a lot of explanation to the elder, or even involved an attorney. It also might have drawn a lot of attention during the elder’s lifetime.
Now, elder abusers simply need to draw up a deed for the elder to sign. Since the new law provides for a statutory form, no significant thought needs to go into it. Once recorded, the property will automatically pass to the elder abuser. That sounds like a victory for crafty (or not so crafty) elder abusers.
Not a Plan for Incapacity, Asset Protection, or Third Party Management
When clients set up an estate plan, they are not only transferring property at death. They are also addressing other important issues: (a) Who will manage my property if I am incapacitated? (b) Will my beneficiaries be mature enough to handle their property? (c) Will my spouse or children be protected in the event of a divorce or creditor claim? (d) Will my home be included in my estate for Medi-Cal eligibility purposes? (e) What are the property tax consequences of transferring property to the named beneficiary?
As a mere transfer of property at death, similar to a TOD or POD, RTODDs do not address (or solve) these other important estate planning issues. For example, transferring property to two siblings might cause a partial reassessment of property taxes if one sibling ends up trying to buy out the other.
Hard to Revoke
When creating an estate plan, attorneys will often prepare general assignments to fund a revocable trust. Some attorneys (not my office) will execute trust transfer deeds and hold them in the file until after a client’s death. However, new AB 139 provides that an RTODD is not revoked unless the instrument revoking the RTODD is recorded. This means that the assignment, or trust transfer deed held in the file, may not be effective to revoke the RTODD. This will undoubtedly result in disputes and litigation in the event a non-recorded instrument purportedly revokes the RTODD, but was never recorded.
In sum, while RTODDs initially appear to be helpful in transferring a residence quickly and cheaply, they probably cause more problems than they solve.
For Californians wishing to efficiently transfer their estate at death, it is better to work with an attorney to create a fully funded revocable trust. Since the trustee has a fiduciary duty to manage all assets on behalf of a trust beneficiary, individuals will be better served both during life and after death. The trust can be used for nearly all one’s assets, not just a residence. Finally, using an expert to set up a trust will prevent the chance of elder abuse later in life.