BILL ANALYSIS Senate Appropriations Committee Fiscal Summary Senator Christine Kehoe, Chair 724 (DeVore) Hearing Date: 08/09/2010 Amended: As Introduced Consultant: Jacqueline Wong-HernandezPolicy Vote: Judiciary 3-2 _________________________________________________________________ ____ BILL SUMMARY: AB 724 would create two new nonprobate property transfers: 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. Specifically, this bill, which would sunset on January 1, 2015, would: 1)Establish rules for making and revoking these deeds, and provide mandatory statutory form deeds and one form revocation for use by transferors of either; 2)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; 3)Provide mandatory statutory forms for the TOD deeds, each containing the required information, instructions, and answers to a long list of "commonly asked questions" about the deeds; 4)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 the transferor's debts; 5)Require the California Law Revision Commission (CLRC) to report back to the Legislature on or before January 1, 2014, on specified data concerning the use, misuse, or misunderstanding of the revocable TOD deed and recommendations for change; and make other conforming changes. _________________________________________________________________ ____ Fiscal Impact (in thousands) Major Provisions 2010-11 2011-12 2012-13 Fund Creates new TOD deeds No direct state or local costs General Court actions Likely minor caseload/workload decrease General* CLRC report Potentially significant workload; likely absorbable General *Trial Courts Trust Fund _________________________________________________________________ ____ STAFF COMMENTS: In 2005, AB 12 (DeVore, Chapter 422, Statutes of 2005) directed the CLRC to study California's non-probate transfer provisions, as well as beneficiary deeds in other states, in order to determine whether California should enact legislation statutorily creating a beneficiary deed. At the time of the CLRC study, Arizona, Arkansas, Colorado, Kansas, Missouri, Nevada, New Mexico, Ohio, and Wisconsin were using revocable TOD deeds. In October 2006, CLRC issued its recommendation that California establish a carefully crafted revocable TOD deed. Page 2 AB 724 (DeVore) Part of the CLRC study focused on the operational issues of how the revocable TOD deeds should work: how a RTDD is established, revoked and challenged, rights of creditors, including Medi-Cal reimbursement rights, and how the transfer works for property held jointly. CLRC considered public comment, and incorporated information into its recommendations for how the process should work, considering the various individuals and governmental entities that might have an interest in some aspect of the TOD deed. This bill incorporates the CLRC recommendations in its development of a process to allow owners of real property, to transfer their property upon death, outside the normal probate procedure, as follows: 1)Allows an interest in real property to be transferred on death by recording a revocable TOD deed (or TOD deed with life estate) signed and acknowledged by the record owner of the property and designating a beneficiary or beneficiaries. The deed transfers ownership of that property interest upon the death of the owner. The transfer is not effective until the death of the transferor. 2)Requires that to be valid, the revocable TOD deed must be recorded within 60 days of execution. Country recorders have existing authority to charge fees for recording documents, and presumably, this would be subject to those same fees. 3)Provides two statutory forms to be used for these processes. One form makes the transfer subject to an intervening life estate by the transferor's designee and the other form does not. Both statutory deeds provide information to the transferor, including explaining how the revocable TOD deed (and TOD deed with life estate) works (including "Commonly Asked Questions" and answers), how it is effectuated, and some of its consequences. The statutory forms give considerable, detailed guidance to both the transferor and the beneficiary about their respective roles and responsibilities with regard to the property itself, the transferors creditors and outstanding debts (including any financial interest Medi-Cal might have in the estate), how the TOD deed would interact with other such deeds, wills, and multiple beneficiaries, as well as the requirement for the beneficiary to record a transfer of ownership in order to become the legal owner of the property. 4)Provides further instruction that, if property is held in joint tenancy or as community property with right of survivorship when the transferor dies, the transfer is void and the property passes pursuant to the right of survivorship. Provides, in the information accompanying the statutory deed, that if a transferor wants to sever the joint tenancy and not have the property pass through right of survivorship rules, the transferor cannot use the revocable TOD deed. 5)Establishes contest of the revocable TOD deed for, among other things, lack of capacity to transfer, transfer to disqualified person, fraud, duress, and undue influence. Page 3 AB 724 (DeVore) The new nonprobate procedures created by this bill, if properly utilized, is unlikely to result in any new state costs. To the extent that TOD deeds result in estates avoiding probate, there will be a decrease in the backlog of probate courts, and existing cases can be settled more quickly. Moreover, to the extent that TOD deeds are utilized by individuals with very little property, and who would have otherwise died without having created a traditional will or living trust, counties may avoid the costs of appointing public administrators to settle the estate. Court workload savings will be offset, to some degree, by any increase in litigation surrounding an individual TOD deed. The degree to which state and local savings may result directly from this bill is unclear. According to the American Bar Association, "there are a plethora of probate avoidance techniques, both simple and complex. Typical of probate avoidance techniques is the addition to the deed of the intended beneficiary during the lifetime of the grantor. This technique is commonly seen in the use of joint tenancy deeds. With the continued aging of the American population, attorneys practicing estate planning see more and more aging parents adding their adult children's names to deeds as joint tenants with right of survivorship with the parents, as a method of avoiding probate, for convenience, and because the aging parents or the children incorrectly perceive that adding the adult children to the deed protects the land from Medicaid recovery?" To the extent that individuals would have used joint tenancy, or other methods, to transfer real property in the absence of this bill, this bill would simply result in another option for the individual but with little change to government entities. As with the existing nonprobate transfers, and other existing estate planning strategies, there is the possibility for abuse. Because the revocable TOD deeds provided in this bill would be new instruments in the state of California, some number of enterprising beneficiaries of real property will likely intentionally attempt to avoid paying property taxes and/or the legally-owed debts of the transferor. These problems exist currently, and it does not appear that there would be unique ability to defraud the government presented by the TOD deeds; during the time that the CLRC is studying the effect of the deeds (until 2014, as required by this bill), there will likely be more scrutiny of TOD deeds than any other property transfer process. The CLRC would be required to study this issue during its initial implementation, and make new recommendations about its continued use (and any proposed changes) to the Legislature by January 1, 2014. Presumably, if the findings were not positive, the Legislature would allow the provisions of this bill to sunset on January 1, 2015.