Beneficiary Liabilities and Transfer on Death Deeds.

The California Revocable Transfer on Death Deed (“TOD Deed”), effective January 1, 2016, is intended as an inexpensive alternative to the revocable living trust for persons of modest means to transfer their noncommercial, residential real property without probate.  Unfortunately, it poses numerous risks and drawbacks to the beneficiary upon the death of the grantor, as discussed below.  [Note: The TOD deed has other limitations and its use can also result in various other unintended consequences not discussed in this article.]

If deceased grantor has unpaid debts, the TOD Deed creates potential liability and risk for the surviving beneficiary if a probate is opened.  For a period of up to three years after the death of the transferor, the personal representative in the probate of the decedent’s estate may demand restitution from any of the beneficiaries  to satisfy such debts.  Thus, the beneficiary not only inherits the real property but also inherits personal liability to pay the decedent’s debts, even unsecured debts, like credit cards, even though unrelated to the real property.

Transferors who use a TOD deed do so to avoid a probate:  When they die the beneficiaries of their estate will rely on the TOD Deed to transfer title to the decedent’s residential real property and on the small estate affidavit procedure to obtain other assets; assuming that the other assets in the decedent’s estate are collectively worth under $150,000.  The foregoing $150,000 threshold excludes any non probate assets that pass without probate to designated death beneficiaries – e.g., life insurance, retirement accounts, and transfer on death financial accounts – or joint tenancy assets that pass without probate to surviving joint tenants.

Nonetheless, the creditors of the deceased transferor may themselves commence a probate in order to timely filing their own creditor claims within one year of the decedent’s death.  The personal representative appointed by the court then has up to three years from the decedent’s date of death to demand restitution from any beneficiary of any TOD Deed executed by the decedent.

Restitution means that the transferor returns title to the real property and any net income (such as rents less expenses) that the beneficiary received since becoming the owner.  Restitution becomes even more burdensome if, after transferring title into his or her name, the beneficiary encumbers the property to secure a loan, improves the property, or sells the property.

If the beneficiary as owner borrows money and secures the loan against the real property, then restitution means both transferring title to the property and paying sufficient money to pay-off the debt.

If the beneficiary sells or gifts the property prior to restitution, then the beneficiary must return all the following:  (1) any net income received prior to the transfer; (2) the fair market value of the property at the time of the transfer (which value may be different than any sale proceeds the beneficiary received); and (3) statutory interest at the annual rate of 10% from date of the transfer to the date of restitution (repayment).  The statutory interest is particularly aggravating as the beneficiary may come out losing money overall.

If the beneficiary improves the property prior to restitution then the beneficiary is only entitled to reimbursement if the improvements were “significant”.  What is significant is not defined, this invites litigation.

Anyone considering the use of TOD Deed should first consult a qualified attorney before proceeding.  After the transferor dies, a beneficiary is well advised to find out as much is possible about the decedent’s debts and creditors.  If the beneficiary prefers not to assume potential liabilities related to the decedent’s debts, then the beneficiary can prevent becoming the owner by filing a written unconditional disclaimer within 9 months of the decedent’s death with the county recorder’s office in the county where the real property is situated.