BILL ANALYSIS SENATE JUDICIARY COMMITTEE Senator Ellen M. Corbett, Chair 2007-2008 Regular Session AB 250 A Assembly Member DeVore B As Amended June 16, 2008 Hearing Date: June 24, 2008 2 Family Code; Probate Code 5 GMO:jd 0 SUBJECT Nonprobate Transfers: Revocable Transfer On Death (TOD) Deed DESCRIPTION The bill would create two new nonprobate property transfer instruments, the "Simple Revocable Transfer on Death (TOD) Deed" and the "Revocable Transfer On Death (TOD) Deed With Life Estate," which would be effective upon death of the transferor. The bill would: establish rules for the making and revocation of these deeds, and provide mandatory statutory form deeds and one form revocation for use by transferors of either deed; outline the beneficiary's liability for debts of the transferor and the procedure for restitution to the estate by the beneficiary of the revocable TOD deed or the revocable TOD deed with life estate, if appropriate; establish the procedure for contesting a revocable TOD deed or a revocable TOD deed with life estate and for a creditor to collect payment for transferor's debts; require the California Law Revision Commission to report back to the Legislature on or before January 1, 2013, on specified data concerning the use, misuse, or misunderstanding of the revocable TOD deed and recommendations for change; and make other conforming changes. The bill contains a sunset date of January 1, 2014. (more) AB 250 (DeVore) Page 2 of ? BACKGROUND AB 250 was heard by this committee on July 10, 2007. At the hearing, the author requested that no vote be taken on the bill. Amendments were made in April and June of 2008 to address some issues raised in last year's analysis of the bill. A summary of amendments made to the bill since it was last heard in this committee may be found in Comment 2. AB 12 (DeVore), Chapter 422, Statutes of 2005, was introduced as a bill to create the instrument that AB 250 now calls "revocable transfer on death deed," but was subsequently amended to instead direct the California Law Revision Commission (CLRC) to study this type of deed and determine whether California should create it as a new nonprobate transfer instrument that becomes effective only upon the death of the transferor. The study was recommended for the following reasons: (1) there is a 1914 California case that already allows for the use of beneficiary deeds (another name for the TOD deed) that has never been overturned ( Tennant v. John Tennant Memorial Home (1914) 167 Cal. 570); (2) various parties, including the California Land Title Company, the California Judges Association, and the Trusts and Estates Section of the State Bar, expressed strong opposition to the bill for lack of clarity and failure to address unintended consequences; and (3) the possibility of countless litigation because of the potential impact of a beneficiary deed on the transferor's property ownership and of fraudulent transfers. The CLRC was directed to address the following non-exclusive list of issues in its study: Whether and when a beneficiary deed would be the most appropriate nonprobate transfer mechanism to use, if a beneficiary deed should be recorded or held by the grantor or grantee until the time of death, and, if not recorded, whether a potential for fraud is created. What effect the recordation of a beneficiary deed would AB 250 (DeVore) Page 3 of ? have on the transferor's property rights after recordation. How a transferor may exert his or her property rights in the event of a dispute with the beneficiary. Whether it would be more difficult for a person who has transferred a potential interest in the property by beneficiary deed to change his or her mind than if the property were devised by will to the transferee or transferred through a trust or other instrument. The tax implications of a beneficiary deed on the transferor, the transferee, and the general public as a result of the nonprobate transfer, including whether the property would be reassessed and if tax burdens would shift or decrease. The CLRC issued its recommendation in October 2006, noting that while the deed has advantages and disadvantages, "creation of a TOD deed would be beneficial in California." CHANGES TO EXISTING LAW Existing law provides various methods by which a person may transfer his or her real property interests to another person upon death, such as through a will, a trust, a joint tenancy with right of survivorship, community property with right of survivorship, an intervivos transfer with reserved life estate, and a nonprobate transfer. Existing law permits the nonprobate transfer of property on death, including an insurance policy, contract of employment, bond, mortgage, promissory note, certified or uncertified security, account agreement, custodial agreement, deposit agreement, compensation plan, pension plan, individual retirement plan, employee benefit plan, trust, conveyance, deed of gift, marital property agreement, or other written instrument of a similar nature. (Probate Code Sec. 5000. All references are to the Probate Code, unless otherwise indicated.) Existing law provides for the nonprobate transfer of real property insofar as persons may execute a revocable deed to a beneficiary while reserving a life estate. ( Tennant v. John Tennant Memorial Home (1914) Cal. 570.) AB 250 (DeVore) Page 4 of ? Existing law provides that upon the death of one joint tenant, real property held in joint tenancy with right of survivorship vests immediately in the surviving joint tenant or tenants. (Civil Code Sec. 683.) Existing law provides that, if a transferee under a will, trust, deed, or other instrument fails to survive the transferor or is treated as if the transferee predeceased the transferor, or fails to survive a future time, the transfer does not lapse but instead passes to the issue of the deceased transferee, except as otherwise provided. (Sec. 21110.) This bill would establish two versions of a new nonprobate transfer instrument, the revocable transfer on death (TOD) deed, for use as specified to transfer real property upon a transferor's death. Specifically, this bill would: (1)define the instrument, the revocable TOD deed, which would transfer real property to a named beneficiary upon the death of the transferor outside of probate, and establish the rules for the making and the revocation of the instrument; (2)define the instrument, the revocable TOD deed with life estate, which would create a life estate in a named life tenant, with a remainder interest in the named beneficiaries; ( This bill would treat both instruments the same in all other respects.) (3)provide a mandatory statutory form of a revocable TOD deed, each containing the required information, instructions, and answers to a long list of "commonly asked questions" about the instrument; (4)establish rules regarding the effect of the execution and recordation of a revocable TOD deed, and their interaction with other types of instruments; (5)establish rules for a revocable TOD deed beneficiary's liability for the debts of a transferor, including rules for when an action is filed based on the debts, rules for the beneficiary's liability for restitution under specified circumstances, who may bring an action to enforce beneficiary's liability, and payment of costs for a proceeding to enforce beneficiary's liability; (6)establish rules regarding the effectuation of the property transfer, and a beneficiary's standing vis ? vis a distributee under a final order of distribution if the AB 250 (DeVore) Page 5 of ? property was probated; (7)establish rules for a contest involving the revocable TOD deed; (8)allow only a personal representative to enforce liability of a beneficiary of a revocable TOD deed or any other beneficiary of a decedent with a small estate, to the extent necessary to protect heirs, devisees, and creditors of the transferor-decedent, and, as to creditors, provide for recovery of the reasonable cost of a proceeding under this provision as an extraordinary service by the personal representative or the attorney of the decedent's estate; and (9)make other conforming changes where appropriate. This bill would direct the California Law Revision Commission to study the effect of the revocable TOD deed as established by this bill and to report to the Legislature on or before January 1, 2013, with specific instructions to study: (1)whether the revocable TOD deed is working effectively; (2)whether the revocable TOD deed should be continued; (3)whether the revocable TOD deed is subject to misuse or misunderstanding; (4)what changes should be made to the revocable TOD deed or the law associated with the deed to improve its effectiveness and to avoid misuse or misunderstanding; and (5)whether the revocable TOD deed has been used to perpetuate financial abuse on property owners and, if so, how the law should be changed to minimize this abuse. This bill contains a sunset provision, making it inoperative on January 1, 2014, unless extended or made permanent by another statute. COMMENT 1. Stated need for the bill The author states that the purpose of the bill is "to AB 250 (DeVore) Page 6 of ? provide a simple and inexpensive way for a person to transfer real property on death. ?Existing law provides other ways to transfer real property to intended heirs without probate, but cannot afford a trust (sic). Without the availability of the TOD deed, some seniors will use other means to make transfer (sic) the property, often with undesirable results. ?The revocable TOD deed would avoid all of these problems." 2. Amendments made to AB 250 since the last hearing on July 10, 2007 Following are the amendments made to the bill since it was heard in committee last year: (a) There are now two instruments, rather than one: (1) the revocable TOD deed and (2) the revocable TOD deed with life estate. The two are treated identically in all respects, except that a revocable TOD deed with life estate names a life tenant and remainder beneficiary(ies). Simulations of these two deeds, together with the Commonly Asked Questions on the back of each deed, is provided to the Committee with this analysis. (b) The revocable TOD deed with life estate and the Commonly Asked Questions page for this deed form have been amended to reflect additional information regarding the life tenant's interest. (c) Both revocable TOD deeds must be recorded within 60 days of signing of the deed. (Previously the bill only required recordation of the revocable TOD deed before transferor's death.) (d) The time for commencing an action and recording a lis pendens to invalidate a revocable TOD deed was extended from 90 days to 120 days after the transferor's death. (e) The statutory revocation form has been changed to remove the requirement of specifying recordation details of the property that was the subject of the TOD deed. (f) The bill now contains a five-year sunset (January 1, 2014). (g) The notary acknowledgement on the statutory form has been updated. AB 250 (DeVore) Page 7 of ? 3. The CLRC Report Proponents of AB 12 (DeVore, Ch. 422, Stats. 2005) as originally drafted argued that a beneficiary deed (or something similar) would be very helpful to small estates, and to lower-income people who cannot afford to engage the services of an attorney for estate planning or other professionals who practice financial and estate planning. Indeed, the CLRC report and recommendation on which this bill is based states that the argument made for a beneficiary deed (another name for a TOD deed) is that "it is cheaper and quicker than probate, less expensive than a lawyer-prepared trust, and preferable to a joint tenancy." (CLRC Recommendation, Revocable Transfer On Death (TOD) Deed, October 2006, page 200) (hereinafter "CLRC Report"). The same report admits, however, that "the revocable TOD deed may appear deceptively simple, yet cause problems not anticipated by a transferor who uses it." (CLRC Report, page 201.) The CLRC reports that it received numerous communications emphasizing that a homeowner should be able to deed property directly to heirs without the expense of probate or a trust proceeding. Indeed staff has received numerous pleas, albeit mostly from the same people since the last hearing, that state they serve senior citizens and that "proposal for a simple, one page state recognized beneficiary deed that we could use at the Senior centers and elsewhere would be a real benefit to California seniors." The sample statutory form created by this bill for each deed is attached to this analysis, as well as the Commonly Asked Questions form for the back of the deed. Although one could argue that each deed is simple enough to fit on one page and the questions list short enough to fit on the back of the deed, each deed is still a daunting document to read, if the user is to understand all of the nuances and after-effects of the legally binding document once properly executed. It would still be questionable whether a potential transferor would actually read and understand the Commonly Asked Questions on the back of the form. The result could be fodder for litigation after transferor's death. AB 250 (DeVore) Page 8 of ? When this committee heard AB 12, the committee recommended that the CLRC report back to the Legislature by January 1, 2009 instead of January 1, 2007 (see Senate Judiciary Committee Analysis of AB 12, dated June 28, 2005, Comment 2). The rationale for the committee's recommendation was that this area is very complex and full of pitfalls for the unwary consumer, and the CLRC should be given the time, given all of its other work, to study the area thoroughly and, if indeed a recommendation to create a beneficiary deed is the result, to draft both the bill and the form deed carefully. However, in this case the CLRC, known for its deliberative, paced work on a vast array of subject matters, completed its work on this subject in less than 10 months, with the recommendation that constituted AB 250 by October 2006. And in the full year since AB 250 was last heard in this committee, the CLRC has not dispelled all of the concerns expressed by those who oppose the use of the simplified TOD deed in California. These concerns remain and are discussed throughout Comments 5, 6, and 7. When AB 250 was heard in the Assembly Judiciary Committee last year, that committee's concerns with the potential misunderstanding and misuse of revocable TOD deeds and the potential cases of fraudulent deeds conveyed under duress or undue influence compelled the committee's amendments to require that CLRC return to the Legislature with a report on specific issues in three years (2012). IS IT WISE TO PLACE A BRAND NEW INSTRUMENT FOR TRANSFERS OF PROPERTY IN THE HANDS OF UNSOPHISTICATED TRANSFERORS BEFORE IT IS FULLY VETTED? GIVEN THE RECURRING HORROR STORIES OF SENIORS BEING CHEATED OUT OF THEIR HOMES BY A VARIETY OF FRAUDULENT SCHEMES, WOULD THIS BILL GIVE SCAM ARTISTS A NEW TOOL WITH WHICH TO DEFRAUD SENIORS? 4. Is the revocable TOD deed for small estates only? There is no doubt the CLRC has done substantial background work on this subject. However, concerns remain that the target users of this revocable TOD deed, AB 250 (DeVore) Page 9 of ? i.e., individuals with small estates and low-income persons, could be misled as to the efficacy of using the deed instead of other avenues that may be available to them now. The bill supposedly targets small estates yet has no limitation on its use. The Probate Code defines small estates as consisting of a combined real and personal property valued at less than $100,000. Thus, a person with $100,000 equity in his home can, under this bill, execute a revocable TOD deed and so can a person with a $1 million equity in her home. However, it is likely that the beneficiary of the transferor with the smaller estate can confirm the transfer of the property by affidavit, as envisioned by this bill, but the beneficiary of the transferor with the larger estate will be in a probate administration proceeding anyway. Further, the transferor with a small estate can simply execute a deed (not a TOD deed, but a plain deed to the property) that is not recorded but delivered to the beneficiary. The beneficiary can record the deed after death and confirm the transfer by affidavit. Under this scenario, what is the advantage of a revocable TOD deed? Another alternative is for the transferor with the small estate to transfer the property to himself or herself and the beneficiary in joint tenancy with right of survivorship. The resulting interest to the beneficiary would not be too different than if the property were transferred via a revocable TOD deed. 5. Revocable TOD Deed: execution, form, warranty of title AB 250 would create a new instrument that would allow the nonprobate transfer of real property. The revocable transfer on death (RTOD) deed must be signed and dated by a transferor with capacity, and acknowledged before a notary public. The deed must be recorded within 60 days of the date it is executed; if it is not recorded within this time period, it is void and ineffective. If properly executed and recorded, the RTOD deed would transfer the property to the beneficiary upon transferor's death. AB 250 (DeVore) Page 10 of ? a. Neither delivery nor acceptance is required The bill would provide that the transferor is not required to deliver a RTOD deed to the beneficiary, and the beneficiary is not required to accept the deed from the transferor, during the transferor's life. (Proposed Sec. 5624 (b) and (c).) Proponents state that the target population of the RTOD deed is senior citizens who are looking for a simple and inexpensive way to give away their one asset, their home. Here is an example of how the non-delivery and non-acceptance requirement could create a problem. Grandpa executes a RTOD deed naming his only grandson as beneficiary of his home, records it within 60 days as required, then quietly puts it away in a box; he doesn't tell anyone about it. Two years later, Grandpa's memory is beginning to fail, although he is not incompetent and still has legal capacity. He forgets the prior recorded, valid RTOD deed in the box in the closet, and he executes another RTOD deed naming his granddaughter who had just spent one week visiting him. He records this second RTOD deed immediately but still does not deliver it to his granddaughter or tells anyone about it. Grandpa clearly intended the property to go to his grandson and he clearly had capacity when he executed the first RTOD deed. Grandpa also clearly intended to give the property to his granddaughter through an RTOD deed but simply forgot that he had already given the property away. Grandpa dies, and now there is a contest, which will have to be resolved by litigation, which is the last thing Grandpa probably would have wanted. Perhaps if the property had a value less than $100,000 the grandchildren would be able to resolve the lack of clarity about Grandpa's intent regarding the property. However, if this house is worth $1 million, the issue of testator's intent would undoubtedly be litigated. Although the rules provided in AB 250 for deciding which RTOD deed would be the operative instrument (the later recorded deed, since both are revocable, proposed Secs. 5628(a); Sec. 5660(b).), the rules provided for execution, recordation, and delivery (or non-delivery) of the deed need clarity. To avoid AB 250 (DeVore) Page 11 of ? litigation, bright lines should be drawn, especially when the testator's capacity and intent could easily be questioned because of his or her being at a vulnerable age. SHOULD THESE RULES BE REVISITED? The California Judges Association (CJA) points out this critical flaw in AB 250 in its letter dated June 11, 2008. The CJA states that because delivery of the deed is not explicitly required, AB 250 leaves the possibility that an executed deed, pocketed for further reflection, may be recorded without the knowledge, consent, or intent of the transferor. This could still be true, even with the 60-day recordation requirement in the bill. Under existing law, a transferor may actually create a valid transfer that is not contingent on the transferor's death, which is then delivered but not recorded until after death. Under AB 250, a revocable TOD deed of the same property later executed and recorded would trump the earlier, valid deed that had been delivered but not recorded. AB 250 does not require delivery of the deed to the RTOD deed beneficiary. Once more, this is fodder for litigation. A deed takes effect only when delivered. (Civil Code Sec. 1054.) Delivery depends on the intention that title will pass irrevocably even though the right of possession and enjoyment may be postponed to a future time. It is a question of fact, and evidence of the circumstances and of the acts and declarations of the grantor ? Delivery may be actual (physical delivery) or constructive. A deed may be deemed constructively delivered to the grantee: (a) when by agreement of the parties it is understood to be delivered and the grantee is entitled to immediate delivery; (b) when it is delivered by the grantor to a stranger for the benefit of the grantee and the grantee's assent is shown or may be presumed. (Witkin, 12 Summary of California Law, 10th Ed. Sec. 291. Citations omitted.) AB 250 requires neither delivery of the deed by the AB 250 (DeVore) Page 12 of ? transferor nor acceptance of the deed by the beneficiary. And as described in previous examples given, an executed RTOD deed (especially one that has been recorded) could be easily filed away in a filing cabinet by a transferor and then unintentionally revoked by the recordation of a new RTOD deed, because the transferor simply forgot that he or she had already executed one. SHOULD NOT DELIVERY OF THE DEED BE REQUIRED? b. Third party may sign the RTOD deed Proposed Sec. 5624(b) provides that a RTOD deed may be signed and dated in a transferor's name by a person other than the transferor at the transferor's direction and in the transferor's presence, but shall be acknowledged by the transferor. AB 250 provides a statutory form of the RTOD deed and the RTOD deed with life estate. A sample of each deed is provided in this analysis. It is not difficult to imagine a scenario where a person may be persuaded by a friend or caregiver to have the friend fill out the form and attempt to sign and date it at the transferor's "direction" in the presence of the transferor and the notary. This is similar to the attestation of a will by two witnesses in the presence of the testator. The difference is that in this case one of the witnesses would be actually signing and dating the instrument and not just witnessing the execution of the instrument by the transferor. There are also problems with use of the statutory form. First, there is no place on the statutory form for the real transferor to acknowledge the act. Second, the acknowledgement of notary language would not permit the friend to sign the RTOD deed, even at the transferor's direction. Third, even if the notary public were to acknowledge the friend's signature as having been "authorized" by the transferor in the presence of the notary, another beneficiary AB 250 (DeVore) Page 13 of ? questioning the validity of the RTOD deed at transferor's death (such as transferor's husband or heir) would undoubtedly go to court and litigate the transfer, especially if the property is a very expensive piece of real estate. IS NOT THIS PROVISION FRAUGHT WITH POSSIBILITIES FOR ABUSE? In fact, for years the courts have been handling thousands of contest cases involving fraudulent transfers, challenges to validity of testamentary instruments, voidable and void instruments, and trust or estate administration questions. WOULD THE CREATION OF THE RTOD DEED BY THIS BILL CAUSE MORE LITIGATION RATHER THAN SIMPLIFY THE TRANSFER OF REAL PROPERTY? c. Revocable TOD deed with life estate Last year, the bill contained one statutory form for the revocable TOD deed, providing an option in the form for a transferor to transfer a life estate to a life tenant and the remainder interest to another beneficiary. Concerns were raised by opponents of the bill regarding the likelihood that users of the statutory form would not be sophisticated enough to understand what those terms mean, and could therefore make mistakes. The bill before the committee today shows two statutory forms, one the "Simple Revocable TOD Deed" and the other the "Revocable TOD Deed With Life Estate." The revocable TOD deed with life estate form shows a line to be filled in for "Life Tenant" and several lines for "Remainder Beneficiaries." On the back of the form, the first question is "What does the TOD Deed do?" and the answer states: "When you die, the identified property will transfer to the "life tenant" for the duration of that person's life. After that person's death, the property will transfer to your "remainder beneficiary(ies)." Probate is not required for a transfer under this deed. The deed has no effect until you die. You can revoke it at any AB 250 (DeVore) Page 14 of ? time." Even though the bill now treats the two deeds separately, still there is little explanation to a layperson of the terms a "life tenant" and "remainder beneficiary" in the statutory forms such that a person who wishes to go with "simple and inexpensive" and thus uses the form will likely still have to consult with a lawyer for advice. The Trusts and Estates Section of the State Bar of California is also concerned about misunderstandings that potential transferors may have about the terms used in the statutory form. They point out that most users of the form will not understand the legal consequences of a revocable TOD deed with life estate, and the potential conflict between the life and remainder interests which could result in a lawsuit between the life tenant and the remainder person. They insist that an individual who desires to create a life estate in a RTOD deed instead of a trust should have it professionally drafted to address the issues that could arise under it. IF A PERSON IS TO AVOID LITIGATION, SHOULD HE OR SHE AVOID USING A REVOCABLE TOD DEED, ESPECIALLY THE STATUTORY FORM? d. Property transferred via RTOD deed would not carry warranty of title Under the bill, property that is transferred via a revocable TOD deed is transferred without warranty of title, and therefore probably not insurable. (Proposed Sec. 5652(d).) Will this present a problem for the beneficiary? Will title companies accept the revocable TOD deed as a valid and insurable title? Will it cost the beneficiary more to obtain title insurance when the property is to be sold? Will the beneficiary be able to get title insurance at all, with or without an exclusion, and at what cost? The California Land Title Association (CLTA) states that they participated in several meetings of the CLRC on the subject of the revocable TOD deed over the course of a year. The CLTA, while extolling CLRC's AB 250 (DeVore) Page 15 of ? hard work in analyzing the subject in depth and in trying to address all possible problems associated with the transfer of real property in a way that effectuates the transferor's intent and avoids litigation, nevertheless concluded that the TOD deed "has developed into a complex and convoluted process that will result in unwary consumers being confused and caught up in unnecessary litigation," (Letter dated April 10, 2008). The CLTA explains their opposition thus: Title companies rely upon the documents recorded in the county recorder's office to determine the status of title for real property. All title defects, liens and encumbrances excluded from coverage are listed in the preliminary report, usually triggering the seller, buyer, and lender to address these title problems through the escrow process. CLTA fully expects that if AB 250 is enacted, some transferors will execute more than one TOD deed over the course of their life as their circumstances change. Divorces, the death of spouses, estranged children or addition of children through marriage, etc., are just a few of the examples that come to mind. Each of these changes could trigger the execution and recordation of a new TOD deed to effectuate a different transfer. Thus, a "stacking" of these deeds in the public records (or in file cabinets and recorded later) would create ambiguity and uncertainty as to the status of title and intent of the original transferor. If there is ambiguity, out of an abundance of caution the title company involved in a transaction would likely resort to the use of quitclaim deeds to resolve ambiguities, thus rendering many - if not all - of the TOD deeds essentially useless. Echoing CLTA's remarks is the California Escrow Association (CEA). The CEA believes that the TOD process contemplated in AB 250 would lead to confusion rather than clarity in the title transfer process. AB 250 (DeVore) Page 16 of ? "Escrow officers are on the front lines in terms of closing real estate transactions. They are in constant contact with the title officers who must be confident that property ownership is sufficiently certain to issue title policies in these transactions. Simply put, we are concerned that unsophisticated parties will record multiple transfer on death deeds, without understanding the legal significance of what they are doing, resulting in great confusion when they subsequently die." (Letter dated June 12, 2008.) e. Revocable TOD deed is not a change in ownership Under this bill, execution and recordation of a revocable TOD deed is not a change in ownership that would trigger a documentary transfer tax or filing of a preliminary change of ownership report. However, on the death of a transferor, the transfer would be considered a change in ownership. Many people may think that by transferring their property through a RTOD deed, they would be able to escape capital gains taxes, gift taxes, and estate taxes. SHOULD THESE ISSUES BE ADDRESSED BY THE BILL? 6. Revocable TOD deed: Revocation Under AB 250, a transferor who has testamentary capacity may revoke a revocable transfer on death deed at any time (Proposed Sec. 5630.). The bill also provides that a revocable TOD deed remains revocable until death. (Proposed Sec. 5614(a)(3).) It is not clear if the revocable TOD deed becomes irrevocable when the transferor becomes incapacitated. How can a TOD deed remain revocable until death when it can no longer be revoked due to incapacity? SHOULD THIS BE CLARIFIED? The CLRC in fact recognized that of the nine revocable deed jurisdictions it studied, none addresses the capacity issue. The CLRC states that the legal capacity to make a will is a lower standard than the legal capacity to make a real property transfer (or to revoke AB 250 (DeVore) Page 17 of ? one?). "Presumably in those [nine] jurisdictions the standard will be the higher standard of contractual capacity, not the less demanding standard of testamentary capacity, that prevails." Yet, the CLRC used "testamentary capacity" as the standard in drafting AB 250. According to the CLRC, the rationale for using testamentary capacity rather than contractual capacity is this: "if a will is challenged for lack of testamentary capacity, that issue is resolved in a probate proceeding, before transfer actually happens. A TOD deed passes directly to the beneficiary, hence any challenge to the transfer could only be retroactive, in a post-death challenge. The revocable TOD deed is like a will, because it is a donative transfer that takes effect on death and is revocable until then. For that reason, testamentary capacity should be sufficient to enable execution of a revocable TOD deed. The possibility of fraud, duress, or undue influence is controlled by execution formalities and the availability of a post-death challenge." Proposed Sec. 5632 (a) requires that an instrument revoking a revocable TOD deed be executed and recorded before the transferor's death "in the same manner as execution and recordation of a revocable transfer on death deed." An executed RTOD deed is not effective until the deed is recorded, within 60 days of the execution of the deed. This is expressly provided in proposed Section 5626(a). In this context, the instrument of revocation should be notarized and recorded within 60 days also, otherwise it should not be effective. IS THIS THE AUTHOR'S INTENT? IF SO, SHOULD NOT THE BILL EXPRESSLY SO PROVIDE? If a transferor executed and recorded a RTOD deed, then later, while still with capacity, executed a valid will that contained a provision revoking that RTOD deed and then disposed of the same property, but the will was not recorded (wills are not usually recorded; they are lodged with the court at transferor's death and then probated), AB 250 (DeVore) Page 18 of ? would the RTOD deed be deemed revoked or would it be the operative instrument as to that property? SHOULD THESE REVOCATION PROVISIONS BE FURTHER REVISED? The CJA contends that AB 250 does not sufficiently address the process of revocation of a RTOD deed. They point out that a will is ineffective upon revocation, and a revocation must be notarized and recorded, presumably in the county where the property lies, not the one in which the transferor resides. "Revocation then becomes dependent on time, distance, office hours, and the precise memory of the transferor. AB 250 ignores these revocation factors and leaves unclear whether a revocation may be filed outside the chain of title, or if it is, then whether it is effective." The vague revocation rules will likely provide fertile ground for litigation. Here is yet another example. Grandpa executes and records a RTOD deed, giving the property to grandson. A year later, he revokes the first RTOD deed and executes and delivers a deed to granddaughter, making her a joint tenant with right of survivorship. Granddaughter immediately records the new deed, but Grandpa has failed to record a revocation of the RTOD deed. Following Grandpa's intent, the granddaughter should prevail but her deed is likely without legal effect because Grandpa failed to record the revocation in a timely manner. Even if the revocation is recorded later, the granddaughter 's deed may still be invalid unless the recording of the revocation relates back to the execution. 7. Creditors: beneficiary is personally liable for transferor's debts Under AB 250 a creditor of the transferor who has an encumbrance or lien of record against the property transferred by a RTOD deed has priority over a creditor of the beneficiary, regardless of whether the beneficiary incurred the obligation before or after the transferor's death and regardless of whether the obligation is secured or unsecured, voluntary or involuntary, recorded or AB 250 (DeVore) Page 19 of ? unrecorded. A beneficiary is personally liable to a creditor for the unsecured debts of the transferor, to the extent provided under the bill. Because the goal of the RTOD deed is to transfer property directly and thus avoid probate, the only mechanism for collecting on outstanding liabilities of the estate of transferor would be a civil action against the RTOD deed beneficiary to restore or return the property so it may be liquidated and distributed to creditors. The California Association of Public Administrators, Public Guardians, and Public Conservators opposes AB 250 because it would jeopardize their ability to recover their costs for administering the estate of a deceased. [The] TOD deed transfers title to the grantor's property to a beneficiary at the moment of death like a joint tenancy interest, without any probate procedure or court oversight. However, unlike joint tenancy (a true non-probate transfer) the beneficiary is still liable to the creditors of the dead grantor. If no administration is opened, the creditors can sue the beneficiary for what is owed to them for one year after the date of death. If a probate is opened, the personal representative [the PA] can sue to recover only the shortage owed to the creditors. If the suit is not opened within three years of the date of death, it can never be opened. This revocable, semi-joint tenancy, nearly-non-probate transfer will create a lot of confusion concerning decedent probate procedures, creditor's rights, heir's rights, beneficiary's liabilities and personal representative's obligation to sue to recover assets that aren't exactly assets. What the Public Administrators (PAs) are concerned about is that under AB 250, a personal representative has the right to ask or sue the beneficiary only for enough to cover the shortage in what is owed to creditors. The PA could be forced to bring a lawsuit under other sections of the Probate Code (Sec. 9653, for example), and to ask for extraordinary fees for the lawsuit. But even if they did, payment would come from the estate, not the AB 250 (DeVore) Page 20 of ? beneficiary who caused the lawsuit because he or she would not pay the liability. PAs would be left with filing fees and legal fees with no assets to pay for them. "The whole structure is one that could encourage many fraudulent transfers for numerous abusive reasons." SHOULD NOT THIS BILL BE HELD UNTIL THE RISK OF FRAUDULENT TRANSFERS IS ELIMINATED? This group has recommended several major changes to AB 250 that are likely to result in the CLRC wanting to revisit the elements of the bill. 8. The statutory forms AB 250 would require a revocable TOD deed to be in a standardized, uniform form in the state. Thus, in the bill are three forms: a revocable TOD deed, a revocable TOD deed with life estate, and a revocation form that is usable for revoking either of the two deeds. Sample forms are attached to this analysis. 9. Sunset date in 2014, CLRC report in 2013 This bill would sunset on January 1, 2014, unless another act extends the statute or makes it permanent. The CLRC would be required to report to the Legislature on or before January 1, 2013, on various items, including whether the revocable TOD deed is subject to misuse or misunderstanding and whether it should be continued. 10. Arguments from supporters The author states that all of the concerns about potential abusers of senior citizens using a revocable TOD deed to perpetrate fraud are equally applicable to the other forms of real property transfer under current law. Because the deed would be recorded, he states, the fraudulent deed would be in the public record and would be subject to discovery by others way before the transferor's death. An attorney who works for Area Agency on Aging (I) states that he strongly believes that when enacted, AB 250 will help avoid some of the most prevalent elder financial abuse (trust mills). In addition, she states, "it will AB 250 (DeVore) Page 21 of ? help countless seniors and other low-income California residents leave their modest estates (often consisting only of a home) to heirs without the expense of probate or living trust." Finally, a letter from a member of the Board of Equalization states the bill would make it easier for property to transfer from the decedent to their designee. Current law adds unneeded expense to what should be a simpler process, she stated. 11. Final comments In fairness, several amendments to the bill have been made to accommodate some of the concerns expressed both in last year's analysis and by opponents of AB 250. In addition a sunset date has been added to ensure the statute would become inoperative automatically should a spate of abuses occur over the next several years. Still, the opponents came back with unabated concerns that the rules for the execution and revocation of a revocable TOD deed under AB 250 are not ready for release to the unwary, the unsophisticated, vulnerable population it is supposed to serve. As the CLRC itself said, clarity is especially important with regards to transfers of real property. Relationships between people change, as people die, become estranged, are institutionalized, get married, divorced, part ways, rendering an earlier decision to gift the real property inappropriate or ill-advised. The one-size-fits all approach of the revocable transfer on death deed may be its biggest weakness. "Historically a 'quick and easy' conveyancing instrument such as a quitclaim deed is often the instrument of choice of a perpetrator of fraud who preys on seniors and unsophisticated consumers. Because it is easy to use, cheap to record and does not require the use of an attorney or other third party intermediary, it facilitates fraud. The ease and simplicity of use associated with the revocable TOD deed suggest that it may lend itself to similar abuse." AB 250 (DeVore) Page 22 of ? 12. Attachments : Sample forms of the Revocable TOD Deeds and Revocation (see pages 19-24 of this analysis). Support: Michelle Steele, Board of Equalization; Sarah Shena, Area I Agency on Aging; David Mandel, California Senior Legal Hotline; Lambda Letters Project; Howard Jarvis Taxpayers Association; Mary Pat Toups, South Orange County Senior Centers Oppose: California Land Title Association; California Escrow Association; California Association of Public Administrators, Public guardians, and Public Conservators; California Judges Association HISTORY Source: California Law Revision Commission (Sponsor) Pending related legislation: None Known Previous Legislation: AB 12 (DeVore) Ch. 422, Stats. 2005. See Background. Prior Vote: Assembly Judiciary Committee (Ayes 10, Noes 0) Assembly Appropriations Committee (Ayes 17, Noes 0) Assembly Floor (Ayes 79, Noes 0) ************** AB 250 (DeVore) Page 23 of ? Recording Requested By: When Recorded Mail This Deed To Name: Address: Assessor's Parcel Number: ____________________________________________________________ ______________ Space Above For Recorder's Use SIMPLE REVOCABLE TRANSFER ON DEATH (TOD) DEED (California Probate Code Section 5642) This document is exempt from documentary transfer tax under Rev. & Tax. Code 11930. This document is exempt from preliminary change of ownership report under Rev. & Tax. Code 480.3. IMPORTANT NOTICE: THIS DEED MUST BE RECORDED ON OR BEFORE 60 DAYS AFTER THE DATE IT IS SIGNED Use this deed to transfer the property described below directly to your named beneficiaries when you die. YOU SHOULD CAREFULLY READ ALL OF THE INFORMATION ON THE OTHER SIDE OF THIS FORM. You may wish to consult an attorney before using this deed. It may have results that you do not want. Provide only the information asked for in the form. DO NOT INSERT ANY OTHER INFORMATION OR INSTRUCTIONS. This form MUST BE RECORDED on or before 60 days after the date it is signed or it will not be effective. PROPERTY DESCRIPTION: Print the address or other legal description of the property affected by this deed: ____________________________________________________________ __________________________ BENEFICIARY(IES): Print the NAME(S) of the person(s) who will receive the property on your death. (DO NOT use general terms like "my children"): ____________________________________________________________ __________________________ ____________________________________________________________ __________________________ TRANSFER ON DEATH AB 250 (DeVore) Page 24 of ? I transfer all of my interest in the described property to the named beneficiary(ies) on my death. I may revoke this deed. When recorded, this deed revokes any TOD deed that I made before signing this deed. Sign and print your name below: Date _____________ NOTE: This deed only transfers MY ownership share of the property. The deed does NOT transfer the share of any co-owner of the property. Any co-owner who wants to name a TOD beneficiary must complete and RECORD a SEPARATE deed. ACKNOWLEDGMENT OF NOTARY State of California ) County of ____________________) On ( date ) before me, (here insert name and title of the officer), personally appeared __________________________, who proved to me on the basis of satisfactory evidence to be the person whose name is subscribed to the within instrument and acknowledged to me that he/she/ executed the same in his/her/ authorized capacity, and that by his/her/ signature on the instrument the person, or the entity upon behalf of which the person acted, executed the instrument. I certify under PENALTY OF PERJURY under the laws of the State of California that the foregoing paragraph is true and correct. WITNESS my hand and official seal. Signature ___________________________ (Seal) ____________________________________________________________ __________________________ COMMON QUESTIONS ABOUT THE USE OF THIS FORM AB 250 (DeVore) Page 25 of ? WHAT DOES THE TOD DEED DO? When you die, your beneficiary will become owner of the property described in the TOD deed. Probate is not required. The TOD deed has no effect until you die. You can revoke it at any time. HOW DO I USE THE TOD DEED? Complete this form. Have it notarized. RECORD the form in the county where the property is located. The form MUST be recorded before your death or it has no effect. HOW DO I "RECORD'' THE FORM? Take the completed and notarized form to the County Recorder for the county in which the property is located. Follow the instructions given by the County Recorder to make the form part of the official property records. WHAT IF I SHARE OWNERSHIP OF THE PROPERTY? This form only affects YOUR share of the property. If a co-owner also wants to name a TOD beneficiary, that co-owner must complete and RECORD a separate form. CAN I REVOKE THE TOD DEED IF I CHANGE MY MIND? Yes. You may revoke the TOD deed at any time. No one, including your beneficiary, can prevent you from revoking the deed. HOW DO I REVOKE THE TOD DEED? There are three ways to revoke a recorded TOD deed: (1) Complete, notarize, and RECORD a revocation form. (2) Create and RECORD a new TOD deed, trust, or other estate planning document that disposes of the same property. (3) Sell or give away the property before your death and RECORD the deed. A TOD deed can only affect property that you own when you die. IF I CREATE A NEW TOD DEED, TRUST, OR OTHER ESTATE PLANNING DOCUMENT THAT DISPOSES OF THE SAME PROPERTY, DOES THAT AUTOMATICALLY REVOKE A RECORDED TOD DEED? No. If you want the new document to revoke a recorded TOD deed, the new document MUST be signed and dated after the deed you wish to revoke and it must be RECORDED. To avoid any doubt about whether the deed is revoked, you can also complete and RECORD a revocation form. I AM BEING PRESSURED TO COMPLETE THIS FORM. WHAT SHOULD I DO? Do NOT complete this form unless you freely choose to do so. If you are being pressured to dispose of your property in a way that you do not want, you may want to alert a AB 250 (DeVore) Page 26 of ? family member, friend, a district attorney, or a senior service agency. DO I NEED TO TELL MY BENEFICIARY ABOUT THE TOD DEED? No. But, secrecy can cause later complications and might make it easier for others to commit fraud. WHAT DOES MY BENEFICIARY NEED TO DO WHEN I DIE? Your beneficiary must RECORD evidence of your death (Prob. Code 210), and file a change in ownership notice (Rev. & Tax. Code 480). If you received Medi-Cal benefits, your beneficiary must notify the State Department of Health Care Services of your death and provide a copy of your death certificate (Prob. Code 215). WHAT IF I NAME MORE THAN ONE BENEFICIARY? Your beneficiaries will become co-owners in equal shares. If you want a different result, you should not use this form. You MUST name your beneficiaries individually. You MAY NOT use general terms to describe beneficiaries, such as "my children.'' WHAT IF A BENEFICIARY DIES BEFORE I DO? You should probably create and RECORD a new deed. Otherwise, the property will transfer according to the general rules on failed gifts, which may not meet your needs. See Prob. Code 21110-21111. WHAT IS THE EFFECT OF A TOD DEED ON PROPERTY THAT I OWN AS JOINT TENANCY OR COMMUNITY PROPERTY WITH RIGHT OF SURVIVORSHIP? If you are the first joint tenant or spouse to die, the deed is VOID and has no effect. The property transfers to your joint tenant or surviving spouse and not according to this deed. If you are the last joint tenant or spouse to die, the deed takes effect and controls the ownership of your property when you die. If you do not want these results, do not use this form. The deed does NOT transfer the share of a co-owner of the property. Any co-owner who wants to name a TOD beneficiary must complete and RECORD a SEPARATE deed.CAN I ADD OTHER CONDITIONS ON THE FORM? No. If you do, your beneficiary may need to go to court to clear title. IS PROPERTY TRANSFERRED BY THE TOD DEED SUBJECT TO MY DEBTS? Yes. DOES THE TOD DEED HELP ME TO AVOID GIFT AND ESTATE TAXES? No. If you wish to avoid gift and estate taxes you should consult a tax professional for advice. HOW DOES THE TOD DEED AFFECT PROPERTY TAXES? AB 250 (DeVore) Page 27 of ? The TOD deed has no effect on your property taxes until your death. At that time, property tax law applies as it would to any other change of ownership. DOES THE TOD DEED AFFECT MY ELIGIBILITY FOR MEDI-CAL? No. AFTER MY DEATH, WILL MY HOME BE LIABLE FOR REIMBURSEMENT OF THE STATE FOR MEDI-CAL EXPENDITURES? If your estate is subject to reimbursement, any property transferred by a TOD deed will also be subject to reimbursement. AB 250 (DeVore) Page 28 of ? Recording Requested By: When Recorded Mail This Deed To Name: Address: Assessor's Parcel Number:_____________________________________________________ _____________________ Space Above For Recorder's Use REVOCABLE TRANSFER ON DEATH (TOD) DEED WITH LIFE ESTATE (California Probate Code Section 5643) This document is exempt from documentary transfer tax under Rev. & Tax. Code 11930. This document is exempt from preliminary change of ownership report under Rev. & Tax. Code 480.3. IMPORTANT NOTICE:THIS DEED MUST BE RECORDED ON OR BEFORE 60 DAYS AFTER THE DATE IT IS SIGNED Use this deed to create a life estate in a named life tenant, with a remainder interest in the named remainder beneficiaries. When you die, the identified property will transfer to the "life tenant" for the duration of that person's life. After that person's death, the property will transfer to your "remainder beneficiary(ies)." This is a complex arrangement that may cause disputes between the life tenant and remainder beneficiaries. You should consult an attorney before choosing to use this form. YOU SHOULD CAREFULLY READ ALL OF THE INFORMATION ON THE OTHER SIDE OF THIS FORM. You may wish to consult an attorney before using this deed. It may have results that you do not want. Provide only the information asked for in the form. DO NOT INSERT ANY OTHER INFORMATION OR INSTRUCTIONS. This form MUST BE RECORDED on or before 60 days after the date it is signed or it will not be effective. PROPERTY DESCRIPTION: Print the address or other legal description of the property affected by this deed: ____________________________________________________________ __________________________ LIFE TENANT: Print the NAME of the life tenant: _______________________________________________________ AB 250 (DeVore) Page 29 of ? REMAINDER BENEFICIARY(IES): Print the NAME(S) of the person(s) who will receive the property on your death (DO NOT use general terms like "my children"). ____________________________________________________________ __________________________ ____________________________________________________________ __________________________ TRANSFER ON DEATH I transfer all of my interest in the described property on my death, as follows: a life estate to the person named as life tenant, with a remainder to the person(s) named as remainder beneficiary(ies). I may revoke this deed. When recorded, this deed revokes any TOD deed that I made before signing this deed. Sign and print your name below: Date _____________ NOTE: This deed only transfers MY ownership share of the property. The deed does NOT transfer the share of any co-owner of the property. Any co-owner who wants to name a TOD beneficiary must complete and RECORD a SEPARATE deed. ACKNOWLEDGMENT OF NOTARY State of California ) County of ____________________) On ( date ) before me, (here insert name and title of the officer), personally appeared ___________________________, who proved to me on the basis of satisfactory evidence to be the person whose name is subscribed to the within instrument and acknowledged to me that he/she/ executed the same in his/her/ authorized capacity, and that by his/her/ signature on the instrument the person, or the entity upon behalf of which the person acted, executed the instrument. I certify under PENALTY OF PERJURY under the laws of the AB 250 (DeVore) Page 30 of ? State of California that the foregoing paragraph is true and correct. WITNESS my hand and official seal. Signature ___________________________ (Seal) ____________________________________________________________ ____________ COMMON QUESTIONS ABOUT THE USE OF THIS FORM WHAT DOES THE TOD DEED DO? When you die, the identified property will transfer to the "life tenant" for the duration of that person's life. After that person's death, the property will transfer to your "remainder beneficiary(ies)." Probate is not required for a transfer under this deed. The deed has no effect until you die. You can revoke it at any time. HOW DO I USE THE TOD DEED? Complete this form. Have it notarized. RECORD the form in the county where the property is located. The form MUST be recorded before your death or it has no effect. HOW DO I "RECORD'' THE FORM? Take the completed and notarized form to the County Recorder for the county in which the property is located. Follow the instructions given by the County Recorder to make the form part of the official property records. WHAT IF I SHARE OWNERSHIP OF THE PROPERTY? This form only affects YOUR share of the property. If a co-owner also wants to name a TOD beneficiary, that co-owner must complete and RECORD a separate form. CAN I REVOKE THE TOD DEED IF I CHANGE MY MIND? Yes. You may revoke the TOD deed at any time. No one, including your beneficiary, can prevent you from revoking the deed. HOW DO I REVOKE THE TOD DEED? There are three ways to revoke a recorded TOD deed: (1) Complete, notarize, and RECORD a revocation form. (2) Create and RECORD a new TOD deed, trust, or other estate planning document that disposes of the same property. (3) Sell or give away the property before your death and RECORD the deed. A TOD deed can only affect property that you own when you die. AB 250 (DeVore) Page 31 of ? IF I CREATE A NEW TOD DEED, TRUST, OR OTHER ESTATE PLANNING DOCUMENT THAT DISPOSES OF THE SAME PROPERTY, DOES THAT AUTOMATICALLY REVOKE A RECORDED TOD DEED? No. If you want the new document to revoke a recorded TOD deed, the new document MUST be signed and dated after the deed you wish to revoke and it must be RECORDED. To avoid any doubt about whether the deed is revoked, you can also complete and RECORD a revocation form. I AM BEING PRESSURED TO COMPLETE THIS FORM. WHAT SHOULD I DO? Do NOT complete this form unless you freely choose to do so. If you are being pressured to dispose of your property in a way that you do not want, you may want to alert a family member, friend, a district attorney, or a senior service agency. DO I NEED TO TELL MY BENEFICIARY ABOUT THE TOD DEED? No. But, secrecy can cause later complications and might make it easier for others to commit fraud. WHAT DOES MY BENEFICIARY NEED TO DO WHEN I DIE? Your beneficiary must RECORD evidence of your death (Prob. Code 210), and file a change in ownership notice (Rev. & Tax. Code 480). If you received Medi-Cal benefits, your beneficiary must notify the State Department of Health Care Services of your death and provide a copy of your death certificate (Prob. Code 215). WHAT IF I NAME MORE THAN ONE REMAINDER BENEFICIARY? Your remainder beneficiaries will become co-owners in equal shares. If you want a different result, you should not use this form. You MUST name your beneficiaries individually. You MAY NOT use general terms to describe beneficiaries, such as "my children.'' You MAY NOT name more than one life tenant. WHAT IF A BENEFICIARY DIES BEFORE I DO? You should probably create and RECORD a new deed. Otherwise, the property will transfer according to the general rules on failed gifts, which may not meet your needs. See Prob. Code 21110-21111. WHAT IS THE EFFECT OF A TOD DEED ON PROPERTY THAT I OWN AS JOINT TENANCY OR COMMUNITY PROPERTY WITH RIGHT OF SURVIVORSHIP? If you are the first joint tenant or spouse to die, the deed is VOID and has no effect. The property transfers to AB 250 (DeVore) Page 32 of ? your joint tenant or surviving spouse and not according to this deed. If you are the last joint tenant or spouse to die, the deed takes effect and controls the ownership of your property when you die. If you do not want these results, do not use this form. The deed does NOT transfer the share of a co-owner of the property. Any co-owner who wants to name a TOD beneficiary must complete and RECORD a SEPARATE deed.CAN I ADD OTHER CONDITIONS ON THE FORM? No. If you do, your beneficiary may need to go to court to clear title. IS PROPERTY TRANSFERRED BY THE TOD DEED SUBJECT TO MY DEBTS? Yes. DOES THE TOD DEED HELP ME TO AVOID GIFT AND ESTATE TAXES? No. If you wish to avoid gift and estate taxes you should consult a tax professional for advice. HOW DOES THE TOD DEED AFFECT PROPERTY TAXES? The TOD deed has no effect on your property taxes until your death. At that time, property tax law applies as it would to any other change of ownership. DOES THE TOD DEED AFFECT MY ELIGIBILITY FOR MEDI-CAL? No. AFTER MY DEATH, WILL MY HOME BE LIABLE FOR REIMBURSEMENT OF THE STATE FOR MEDI-CAL EXPENDITURES? If your estate is subject to reimbursement, any property transferred by a TOD deed will also be subject to reimbursement.