California’s New Transfer on Death Deed
As of January 1, 2016, California law allows the use of transfer on death (TOD) deeds for real property. A TOD deed is a revocable beneficiary deed, involving the transfer of an individual’s residence (limited to multi-unit properties with fewer than four dwelling units, condos and single family residences with fewer than 40 acres of agriculture land), which does not become a completed transfer until the death of the transferor. Essentially, the deed allows an individual to transfer their property to a beneficiary without the use of a revocable trust or the need of a probate court.
At death, the TOD deed transfers property by operation of law, like joint tenancy or community property with right of survivorship. The transferor remains the sole owner during his or her lifetime and he or she can revoke the TOD deed at any time. The recording of a TOD deed does not change the income tax benefits of owning the residence (think mortgage deduction) nor does it have any effect on property tax.
The TOD deed is a simpler and less expensive option relative to transferring real property through a revocable trust or the probate process. Individuals who do not have significant assets subject to probate and who wish to leave their residence to named individuals could use a TOD deed to accomplish their estate planning objectives, but it does have its limitations.
Leaving the property to multiple beneficiaries with a TOD deed creates administrative difficulties as all named beneficiaries become owners of undivided interests in the property.
The benefit of having one’s residence, and all other significant assets, pass through a revocable trust, allows a single trustee to marshal the assets and distribute them as the transferor wishes.
If a transferor wishes for property to be held in ongoing trusts or with other restrictions, then a TOD deed could not accomplish that goal.
A TOD deed, while useful in limited circumstances, does not supplant the need for a revocable trust in many individuals’ estate plans. A revocable trust is still the preferred and best approach to estate planning in California.