BILL ANALYSIS Ó AB 699 Page 1 Date of Hearing: March 22, 2011 ASSEMBLY COMMITTEE ON JUDICIARY Mike Feuer, Chair AB 699 (Wagner) - As Introduced: February 17, 2011 As Proposed to be Amended SUBJECT : Non-Probate Transfers: ReVOCABLE TRANSFER UPON DEATH DEEDS KEY ISSUES : 1)Should owners of real property be PERMITTED to transfer their property on death outside of probate through a "ReVOCABLE TRANSFER UPON DEATH DEED"? 2)Might this bill INADVERTENTLY make estate planning more complicated by creating yet another non-probate device WHICH could add CONFUSion to THE ESTATE PLANNING PROCESS and make FINANCIAL abuse easier to commit? FISCAL EFFECT : As currently in print this bill is keyed fiscal. SYNOPSIS This bill, following recommendations by the California Law Revision Commission (CLRC), allows owners of real property, until January 1, 2017, to transfer their property upon death, outside the normal probate procedure, through a written instrument known as a "revocable transfer upon death deed" (RTDD). Very similar bills - AB 250 (DeVore, 2007) and AB 724 (DeVore, 2009-10) - unanimously passed out of this Committee and the Assembly, but failed passage in the Senate. In 2005, legislation 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. In recommending creation of an RTDD in California, the CLRC balanced the generally positive, although quite limited, experience of other states, the need for a simple, low-cost method of conveying real property with the very real concerns of possible misuse or abuse raised by opponents of the RTDD. AB 699 Page 2 In order to address some of opponents' well-founded concerns, the CLRC recommends that California undertake a comprehensive review of all non-probate transfers and their consequence. However, in the interim, the CLRC recommends that California establish a carefully crafted RTDD. As recommended by the CLRC, this bill establishes a new, non-probate method for conveying real property upon death through an RTDD that is signed and recorded within 60 days of execution. The RTDD, which requires use of a statutorily created deed, does not affect any ownership rights during the transferor's lifetime nor does it convey any rights to the beneficiary or the beneficiary's creditor during the transferor's lifetime. It may be revoked at any time by a subsequently recorded document that disposes of the property. In support, the author states that this bill is necessary to "fill a major gap in estate planning instruments available to ordinary citizens, by providing a straightforward, inexpensive, and reliable means of passing real property directly to a beneficiary, to go along with the many options California citizens currently have to pass personal property to their loved ones outside of the long, complicated and expensive probate process. The bill is particularly intended for the benefit of senior citizens whose estate consists primarily - or even exclusively - of the family home (there are thousands of elderly people throughout the state who are barely getting by, but whose home, purchased long ago and paid off, may be worth several hundreds of thousands of dollars), and unmarried homeowners who wish to leave their home to their partner, loved one, or family member upon death, but do not want to transfer a present ownership interest in the property ." The bill is co-sponsored by California Communities United Institute and the Conference of California Bar Associations, and supported by AARP and the California Senior Legislature who believe that the bill provides seniors with a simple, no cost method to transfer property to their heirs. The bill is opposed by the California Land Title Association, the California Escrow Association, and California Advocates for Nursing Home Reform, who argue that the bill inadvertently creates "'drive-by' estate planning that puts California's most vulnerable group - senior citizens - at great risk for personal fraud." AB 699 Page 3 SUMMARY : Seeks to establish, until January 1, 2017, a new, non-probate method for conveying real property upon death through a "revocable transfer upon death deed." Specifically, this bill : 1)Allows an interest in real property to be transferred on death by recording an RTDD 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. Is effective for any RTDD made by a transferor who dies on or after January 1, 2012, regardless of when the RTDD was executed or recorded. No RTDD may be executed on or after January 1, 2017, but any RTDD properly executed before that date remains valid and may be revoked after that date. 2)Requires that to be valid an RTDD must be recorded within 60 days of execution. 3)Provides that an RTDD does not affect any ownership rights during the transferor's lifetime and nor does it convey any rights to the beneficiary or the beneficiary's creditors during the transferor's lifetime. An RTDD is not effective until the transferor's death. 4)Provides a statutory form RTDD and requires that an RTDD must be in that form. The statutory deed provides information to the transferor, including explaining how the RTDD works, how it is effectuated and some of its consequences. 5)Provides a statutory form for revocation of an RTDD. 6)Provides that an RTDD may have multiple beneficiaries, who take in equal shares as tenants in common, but does not provide for alternate beneficiaries. The RTDD does not provide for class gifts, e.g., gifts to the transferor's unnamed grandchildren. 7)Provides that an RTDD is revocable at any time by a transferor with testamentary capacity. If an RTDD and another revocable instrument have both been recorded and both purport to dispose of the same property, the instrument that has been executed later prevails. If two deeds - one revocable and one irrevocable - are both recorded, the irrevocable deed prevails, even if recorded earlier. AB 699 Page 4 8)Provides that an RTDD must transfer all the transferor's interest in the property. 9)Provides that property subject to an RTDD is still part of the transferor's estate for purposes of Medi-Cal eligibility and will be subject to Medi-Cal reimbursement claims. Property subject to an RTDD is subject to claims from the transferor's secured and unsecured creditors. Allows the beneficiary to avoid unsecured claims by returning the property to the transferor's estate. 10)Requires the beneficiary to effectuate transfer of the property by recording an affidavit of the transferor's death. 11)Provides 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 RTDD. 12)Permits contest of the RTDD for, among other things, lack of capacity to transfer, transfer to disqualified person, fraud, duress, and undue influence. 13)Requires the CLRC to study the effects of the RTDD and make recommendations to the Legislature by January 1, 2016. EXISTING LAW : 1)Directs the California Law Revisions Commission to study the effect of California's non-probate transfer provisions and statutes in other states that establish beneficiary deeds as a means of conveying real property through non-probate transfers, with the objective of determining whether such legislation should be enacted in California. (AB 12 (DeVore), Chap. 422, Stat. 2005.) 2)Permits the non-probate transfer on death of non-real property instruments including an insurance policy, contract of employment, bond, mortgage, promissory note, certified or uncertified security, account agreement, custodial agreement, AB 699 Page 5 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 Section 5000.) 3)Provides that upon 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 Section 683.) 4)Provides for the non-probate 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) 167 Cal. 570.) 5)Provides that, if a transferee under a will, trust, deed or other instrument fails to survive the transferor, transfer does not lapse but passes to the issue (decedents) of the transferee if the transferee is related to the transferor or the transferor's spouse. (Probate Code Section 21110.) COMMENTS : In 2005, the Legislature passed AB 12 (DeVore), Chap. 422, Stat. 2005, which directed the CLRC to study California's non-probate transfer provisions and determine whether California should enact a beneficiary deed - a deed which transfers real property outside of probate upon death of the transferor. In October 2006, the CLRC issued its recommendation that California adopt a revocable transfer on death deed, noting that while the deed has advantages and disadvantages, creation of such a deed would, on the whole, be beneficial in California. AB 250 (DeVore, 2007) and AB 724 (DeVore, 2009-10) sought to implement the recommendations of the CLRC and create an RTDD in California. Both bills passed out of the Assembly without a "no" vote, but failed passage in the Senate. This bill is nearly identical to those bills, except that it does not allow for a life estate as part of an RTDD. According to the author: Enactment of AB 699 will fill a major gap in estate planning instruments available to ordinary citizens, by providing a straightforward, inexpensive, and reliable means of passing real property directly to a beneficiary, AB 699 Page 6 to go along with the many options California citizens currently have to pass personal property to their loved ones outside of the long, complicated and expensive probate process. The bill is particularly intended for the benefit of senior citizens whose estate consists primarily - or even exclusively - of the family home (there are thousands of elderly people throughout the state who are barely getting by, but whose home, purchased long ago and paid off, may be worth several hundreds of thousands of dollars), and unmarried homeowners who wish to leave their home to their partner, loved one, or family member upon death, but do not want to transfer a present ownership interest in the property. Existing law offers these individuals no good options. Transfer by will (even a statutory or holographic will) makes the property subject to statutory probate fees of thousands of dollars. Establishing a revocable trust can cost well over $1,000 if done by a reputable attorney, and can place the prospective trustor at the mercy of scam artists and charlatans if it is not. Other alternatives generally suffer from problems of cost, complexity, tax implications, irrevocability, or a combination of all these issues. (Footnote omitted.) California Law Revision Commission Study : As directed by the Legislature, the CLRC conducted a study to determine whether a beneficiary deed should be statutorily created in California. In particular, the Legislature asked the CLRC to address the following specific issues: (1) Whether and when a beneficiary deed would be the most appropriate non-probate 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. (2) What effect the recordation of a beneficiary deed would have on the transferor's property rights after recordation. (3) How a transferor may exert his or her property rights in the event of a dispute with the beneficiary. (4) 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 AB 699 Page 7 transferee or transferred through a trust or other instrument. (5) The tax implications of a beneficiary deed for the transferor, the transferee, and the general public as a result of the non-probate transfer, including whether the property would be reassessed and if tax burdens would shift or decrease. The CLRC began its study by reviewing existing options for transferring real property at death. These methods include transfer by will or intestate succession, trust, survivorship rights created by joint tenancy or community property, transfer with a reserved life estate, and a revocable transfer deed as recognized by Tennant v. John Tennant Memorial Home (1914) 167 Cal. 570. Each of the methods of transfer has its advantages and disadvantages. For example, a will generally requires probate, which is a time consuming and costly way to transfer property. A trust is expensive to set up, particularly if the sole purpose is to convey one piece of property. Joint tenancy with right of survivorship creates immediate property interests in all the joint tenants. A current transfer, with a reserved life estate for the transferor, is nonrevocable, preventing the transferor from later changing his or her mind. A revocable deed under Tennant has been used rarely and its legal consequences are not fully understood. At the time of the CLRC study, nine other states, including Colorado, New Mexico, Ohio and Wisconsin, statutorily recognized an RTDD. (Today four additional states have statutorily authorized RTDDs.) The CLRC's investigation revealed minor difference between the states' RTDDs and found that practitioners generally liked having the option of the RTDD. However, most of the statutes were too new to provide evidence of their effectiveness or of their susceptibility to misuse or abuse. The CLRC then focused on the operational issues of how an RTDD should work. The result is the very detailed statutory rules set out in this bill. They govern how an RTDD is established, revoked and challenged, rights of creditors, including Medi-Cal reimbursement rights, and how the transfer works for property held jointly. Detailed provisions are set out above. Finally, the CLRC considered public comments. Generally groups that provide legal assistance to seniors favor creation of the AB 699 Page 8 RTDD. These groups argue that seniors on a limited income needed a low-cost, simple method of transferring real property. An RTDD, they contend, will help individuals avoid both probate and trust mills, which can be costly and inefficient, especially for a small estate containing only a single family home. Other professionals, including judges, attorneys, lenders and title companies had more reservations. They noted that while an RTDD creates a quick and low-cost way to transfer property, "it is not necessarily the safest or most reliable method of accurately ensuring the transferor's wishes are carried out as the transferor intended." (CLRC Report at 205.) They argued that, like a quitclaim deed that can be executed without an attorney, it can be abused and can help facilitate fraud on the transferor or his intended beneficiaries. Moreover, because it is so simple to use, it may be used inappropriately, without advice of counsel. Finally, they argue that the RTDD is just another device added to the proliferation of estate planning tools, resulting in further "confusion, inconsistency, litigation, and frustration for all involved." (CLRC Report at 206.) In recommending creation of an RTDD in California, the CLRC balanced the generally positive, although quite limited, experience of other states, the need for a simple, low-cost method of conveying real property with the very real concerns raised by opponents of the RTDD. In order to address some of opponents' well-founded concerns, the CLRC recommends that California undertake a comprehensive review of all non-probate transfers and their consequences. However, in the interim, the CLRC recommends that California establish a carefully crafted RTDD. National Conference of Commissioners on Uniform State Laws Approves RTDDs : In 2009, the National Conference of Commissioners on Uniform State Laws approved a uniform act on RTDDs. According to their report, 13 states, including Arizona, Nevada and Oklahoma now authorize RTDDs, and five more are considering it this year. (National Conference of Commissioners on Uniform State Laws, Uniform Real Property Transfer on Death Act (2009).) This bill establishes a mandatory RTDD form . This bill establishes a mandatory form RTDD that must be used when executing an RTDD. The mandatory form prevents a transferor from using the RTDD if he or she wants to transfer his or her AB 699 Page 9 property other than as permitted by the form. Failure to use the statutory form does not necessarily invalidate the deed, but the provisions of this bill would not apply to such a deed. The transfer may still be valid under the Tennant case. The transferor can also dispose of his or her property through use of another testamentary instrument, such as a will or a trust. Establishing a mandatory RTDD has several advantages. It standardizes the form, which will help ensure that property owners who do not seek legal counsel may be able to successfully transfer property through use of an RTDD. It also makes implementation of the RTDD easier for title companies. In addition, the statutory deed informs transferors of their rights and the rights of their beneficiaries, and explains some of the pitfalls of the RTDD. Some will argue that the RTDD should be designed to be more flexible, taking into consideration many possible wishes that a transferor may have and helping to effectuate them, particularly allowing the transferor to create a life estate. A life estate permits the holder to occupy the property exclusively during his or her lifetime. The property is then transferred automatically to the remainder beneficiaries on the death of the life tenant. Life estates can serve very useful estate planning purposes. For example, a homeowner, who has children from a prior marriage, can leave his house to his children, while still ensuring his second wife has a home to live for the remainder of her life. Previous versions of the bill allowed for a life estate. However, the Trusts and Estates Section of the State Bar had opposed the life estate provision, believing there were too many complicated considerations to allow a life estate to be accomplished by a form deed, and this bill does not permit the use of a life estate. However, the statutory form, with its significant risks of misuse by those who do not consult with counsel when appropriate, may not be able to be everything to every transferor. Instead, the form attempts to help effectuate the most common wish of transferors with relatively simple property issues - to transfer the property to their beneficiaries. A transferor with more complicated needs should rightly consult with experts and transfer the property through other transfer options. AB 699 Page 10 The RTDD provides for multiple beneficiaries, but not alternate beneficiaries . The RTDD provides for transfer to multiple beneficiaries who take their interest equally as tenants in common. The bill requires that the beneficiaries must be specifically named and cannot include a class of people, such as transfers to "my children and grandchildren." Most other states with RTDD also preclude class gifts. Prohibiting class gifts allows the title company to readily ascertain who the beneficiaries are, thus preventing delays or other complications in the transfer of title. The bill specifically prevents the use of alternate beneficiaries should any named beneficiary predecease the transferor. As a result, the general rules of lapse come into play. Under California's lapse and anti-lapse rules, if a transferee under a will, trust, deed or other instrument fails to survive the transferor, the transfer does not lapse but passes to the transferee's issue (decedents) as long as the transferee is related to the transferor or the transferor's spouse. (Probate Code Section 21110.) If the transferee is not related, the transfer fails and the property comes back into the transferor's estate for disposition. While several of the states that have RTDDs have specifically prohibited application of anti-lapse rules to these deeds, the CLRC believes that "equity demands application of the anti-lapse principles" to RTDDs just as they apply to other testamentary gifts and that application of these principles is precisely what the majority of transferors would intend. (CLRC Report at 172.) If, at the transferor's death, property is held jointly with right of survivorship, the RTDD is void . Under current law, when property is help by joint tenancy or by community property with right of survivorship and one of the joint tenants or spouses dies, the property passes, by operation of law, to the other joint tenant(s) or the surviving spouse. Absent severance of the joint tenancy, any attempt to transfer the property by the first joint tenant to die is ineffective. The property passes to the surviving joint tenant(s) or spouse. The bill proposes to follow that general rule for the RTDD. All joint tenants or spouses can execute a separate RTDD. Only the RTDD of the last joint tenant or spouse to die will be effective. That last joint tenant or surviving spouse can always change his or her mind and revoke the RTDD since he or AB 699 Page 11 she owns the property free and clear. The bill and the statutory deed make clear that if property is held jointly with right of survivorship, an RTDD executed by the first to die will have no effect. Will the bill have the unintended consequence of steering persons away from legal assistance that they may need ? It is unclear what role lawyers will play in the execution and recording of these RTDDs. On the one hand, the author suggests that the reform might allow real property owners to avoid lawyers altogether through the simple recording of a beneficiary deed. On the other hand, the primary criticism of the "trust mills" is that they minimize the role of lawyers, through the use of prefabricated trusts, when the input of a lawyer's expertise is often necessary. The State Bar's Conference of Delegates passed a resolution in response to the original RTDD bill expressing concern that, in creating yet another "probate avoidance" device, the bill may have the unintended consequence of steering people away from needed legal assistance that can avoid unforeseen problems in estate planning. An RTDD could increase the risk of financial abuse . A simplified RTDD could make it easier to commit financial abuse. Seniors could sign without realizing what they were signing or its consequences. Proponents of the bill counter that far simpler tools - such as a quitclaim deed which transfer all of a person's interest in real property to the beneficiary at execution - already exist that can cause far more harm. However, just because there are other tools to transfer property that are also subject to abuse, does not mitigate the fact that this new transfer tool could cause significant harm to unwary seniors and other property owners: There is a very real possibility that an RTDD could be used as a tool for financial abuse or could simply be misused by those who do not understand the transfer deed and all its implications. This concern is highlighted by a story from an opponent of a previous version of the bill about his father whose live-in caregiver not only had him execute a new will making the caregiver his beneficiary but also made the caregiver his beneficiary on all pay on death accounts and executed a New Mexico RTDD in favor of the caregiver. While this case does indeed demonstrate how the RTDD can be misused and abused in the wrong hands, it also makes clear that existing methods of AB 699 Page 12 conveying property at death can be abused and why significant transfers to caregivers are particularly suspect. In recognition of the risks associated with an RTDD, the bill directs the CLRC to study the effect of the RTDD in California and report back to the Legislature by January 1, 2016. The report must address the following issues: (1) whether the revocable transfer on death deed is working effectively; (2) whether the revocable transfer on death deed should be continued; (3) whether the revocable transfer on death deed is subject to misuse or misunderstanding; (4) what changes should be made to the revocable transfer on death deed or the law associated with the deed to improve its effectiveness and to avoid misuse or misunderstanding; and (5) whether the revocable transfer on death deed has been used to perpetuate financial abuse on property owners and, if so, how the law associated with the deed should be changed to minimize this abuse. The bill also, by its own terms sunsets on January 1, 2017. RTDDs executed before that time would remain valid, but RTDDs executed after that date would not be valid. This sunset, together with the study by CLRC, should help minimize risks of abuse or misuse associated with the RTDD, but would not prevent such risks during the five years that RTDDs would be valid in California. Author's Amendment : This bill establishes a pilot program, with a required study by CLRC. However, as currently drafted, the pilot terminates on the same dated that the required study is due to the Legislature. Thus, the Legislature may not have the important evaluative information available to consider, if it elects to extend the pilot before termination. In order to ensure that the Legislature has the required evaluation timely, the author rightly agrees to amend the bill so that the required evaluation is due a year before the pilot terminates. This can be accomplished with the following amendment: On page 33, line 20, delete "2017" and insert: "2016" ARGUMENTS IN SUPPORT : The bill is supported by AARP and the California Senior Legislature who believe that the bill provides seniors with a simple, low- cost method to transfer property to their heirs without the time and expense of a probate proceeding. AB 699 Page 13 ARGUMENTS IN OPPOSITION : Opponents, argue that the bill inadvertently creates "'drive-by' estate planning that puts California's most vulnerable group - senior citizens - at great risk for personal fraud." California Escrow Association and California Land Title Association believe that if this bill becomes law, RTDDs "will become the new form of easy, convenient, and cheap elder abuse." In addition, they believe the RTDD is "complex and convoluted" and, when used by transferors without advice from legal counsel, could well create confusion and ambiguity that could cloud the property's title. California Advocates for Nursing Home Reform adds that the bill "may result in seniors inadvertently leaving their estates to individuals whom they might not otherwise want to succeed them." REGISTERED SUPPORT / OPPOSITION : Support California Communities United Institute (co-sponsor) Conference of California Bar Associations (co-sponsor) AARP Congress Senior Legislature Opposition California Advocates for Nursing Home Reform California Escrow Association California Land Title Association Analysis Prepared by : Leora Gershenzon / JUD. / (916) 319-2334