Should You Use a TOD Designation on Your House?
The following article is a summary of the conversation with Amar Shah, Founder of Client First Capital, and Alex Rodriguez, Principal Attorney at Rodriguez Law Offices, about titling your house and the pros and cons of a TOD (Transfer on Death) designation.
Amar: I get this question all the time from prospective clients as well as clients: “How do you title your house?”
Alex: My answer tends to be that the best way you can title your property is usually going to be with a living trust. However, we’re not going to talk about that today. Instead, we’re going to focus more on Transfer on Death (TOD) deeds because one of the most common questions I get from clients is, “can I just do a Transfer on Death deed to transfer my home to my kids?”
Let’s start by saying that there are many ways to create a transfer. As I mentioned, my preferred method is with a living trust, but you can also do it with a will, with joint tenancy, and a Transfer on Death deed. There are many options. Today we’re just going to focus on the Transfer on Death deed.
Amar: What is Transfer on Death?
Alex: It’s very much like a life insurance policy where you name your beneficiary, and then upon your death a contract is created that transfers your life insurance policy proceeds to your beneficiary. It’s the same concept for a Transfer on Death deed, except instead of a life insurance policy, it’s the actual title to your home. Upon your death, you’re creating a contract that transfers it to your named beneficiary.
Amar: So, that has to be recorded somewhere, right? You have to go to the county recorder or do it online?
Alex: There are some virtual recording places, or you mail the county recorder. Essentially, for the Transfer on Death deed, it’s not just putting it on a piece of paper and recording it. It’s actually a very specific form that California has come up with. The rule is that you have to use a form that substantially like the form that they provide. So really, the best thing to do is just use the form that they give you if you don’t want to mess up.
Let me start with this, though. I am not a fan of Transfer on Death deeds. I’ll be very upfront with that. A lot of my colleagues also aren’t very big fans, and I’ll explain that in a little bit more detail. But to start, it is a good idea to give the parameters of what it is and how you do it.
It is a law that was passed by California that went into effect in 2016. It was supposed to expire earlier this year, on January 1, 2021, but it’s been extended to January 1, 2022. I think the legislature is still trying to figure out if they’re going to extend it even more. But, if you did a TOD prior to that time, it’s going to be valid.
The intent was that they wanted to provide a way for lower-income families to be able to pass their home to their loved ones and avoid probate because probate is so expensive. So, the statutory form was created, and, as I mentioned, it has to pretty much be that form. Use the form that’s provided, and it must be signed and notarized. It has to be recorded within 60 days of the signing. Sometimes with deeds, you can get away with not recording right away and it’s still valid. With the Transfer on Death deed, it must be recorded within 60 days, or it’s not good anymore.
Amar: And so, if you’re not in California, you should probably go to your county recorder’s office to figure out what the rules are in your state or your county, right?
Alex: Here’s the thing… the county recorder most likely is going to say we can’t give you legal advice so please go seek it. At the end of the day, it is always better to get legal advice before you make a decision, especially something as big as this. And as I mentioned, I’m not a big fan of TODs, but I do think it’s important to at least explain what they are, and give the pros and cons. Then, each person can make their own decision. I strongly advise you to go seek the advice of an attorney because for your situation, this may or may not be a good tool for you. So, with that said, let’s start with what the pros are. Amar, what do you think is one of the biggest pros?
Amar: I’m going to throw a dart out there and say that it avoids probate!
Alex: That is exactly it. It avoids probate. That is the biggest benefit going for this, and it’s a less expensive way of avoiding probate compared to creating a trust. So, theoretically, this tool is meant to be a more accessible, affordable option for individuals. For me, those are really the only two pros that we have going.
Now, let’s jump into what the cons are. One of the downsides of creating a Transfer on Death deed is that you can only do it with specific types of property. If you have commercial property, this is not for you. It’s meant for a single-family home, condo, things like that. Also, in my opinion, it’s not a good option if you have multiple beneficiaries. Your beneficiaries may not want to own that property together, and there may be conflicts. If you had it in a trust, you’re allowing the trustee to sell it or liquidate it or do whatever they need to do to divide those assets. It’s a lot easier with a living trust. It’s also not a good option if the beneficiary is a minor because minors can’t own property and they can’t manage it for themselves. If you name a child as the beneficiary under this TOD, they’re still going to have to go to court to get a guardianship. And here’s the big kicker. It’s also not a good option if the beneficiary intends to sell or refinance the property that they’re receiving. Title companies will not issue a title insurance if it’s less than three years from the date of death. That’s a really big thing. If you receive a property, and you intend to sell it, or you need to refinance it to take some money out, you’re out of luck. You’re most likely not going be able to find a lender willing.
Amar: It kind of puts handcuffs on your beneficiaries for doing anything.
Alex: Precisely. One of the benefits of owning a piece of real property is that it’s up to you to decide how you want to best manage it. But this really does put a big limit—three years is a long time. That tends to be one of the biggest reasons why attorneys are not big fans of this. During those three years, creditors can come after you and because you received this property from the decedent and, if he or she owed debt, they will try to get paid from that. That is the number one reason why title insurance companies will not touch a home that was transferred via Transfer on Death versus if you went through probate or a trust. With those, there are mechanisms in place to really cut that off after a year. But not the case with this Transfer on Death deed.
Amar: This reminds me of when I was working with a family in which the husband had deceased, and the wife was living in the house. They had three children and one child became like the caregiver for mom. After a year or two, the siblings started noticing fishy stuff going on with the finances. One of the things that they noticed was that the mom took the house out of the trust and did a Transfer on Death to the child that was the caregiver. This process could probably open up opportunities for elder abuse.
Alex: You are exactly right. Another big reason why attorneys are not fans of this—especially the elder law attorneys in California—is that our aging population are vulnerable to those who may say, “just sign this,” and it doesn’t have to go through an attorney. There are no protections in there. In my opinion, that opens up a lot of potential litigation. It’s so much better when you go through an attorney who is advising you so that you are fully represented and understand all the sides in order to make a decision that’s going to hold up a lot better.
Amar: There you have it. There are multiple ways to transfer a house to your loved ones. To find out what makes the most sense for your situation we suggest that you reach out to Alex or another attorney that specializes in the area.
The content of this article is for legal education and marketing only and should not be considered advice. It does not take your situation into account. If you have specific questions needs in this area for your situation, please reach out for professional advice.
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Rodriguez Law Offices is a San Diego law firm committed to providing client services in the areas of Estate Planning, Trust Administration, and Probate. Contact the offices by calling 619-238-5270 or visit www.sandiego-estateplanninglawyers.com.
