BILL ANALYSIS Ó
AB 139
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Date of Hearing: March 17, 2015
ASSEMBLY COMMITTEE ON JUDICIARY
Mark Stone, Chair
AB 139
(Gatto) - As Amended March 5, 2015
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?
SYNOPSIS
This bill, following recommendations by the California Law
Revision Commission (CLRC), allows owners of real property,
until January 1, 2021, 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 699 (Wagner, 2011), AB 250
(DeVore, 2007) and AB 724 (DeVore, 2009-10) - passed out of this
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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 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. In order to
address some of the opponents' well-founded concerns, the CLRC
recommended that California undertake a comprehensive review of
all non-probate transfers and their consequences. However, in
the interim, the CLRC recommended 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 creditors during the
transferor's lifetime. It may be revoked at any time by a
subsequently recorded document that revokes the RTDD or disposes
of the property.
The bill is supported by California Communities United Institute
and the Conference of California Bar Associations, 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 and
the California Escrow Association, who argue that the bill
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"creates risks that put California's most vulnerable group -
senior citizens - at great risk for real property fraud."
SUMMARY: Seeks to establish, until January 1, 2021, 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,
2016, regardless of when the RTDD was executed or recorded.
No RTDD may be executed on or after January 1, 2021, 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, 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.
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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.
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
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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, 2020.
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,
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.)
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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.)
FISCAL EFFECT: As currently in print this bill is keyed fiscal.
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), AB 724 (DeVore, 2009-10) and AB 699 (Wagner,
2011) sought to implement the recommendations of the CLRC and
create an RTDD in California. All three bills passed out of the
Assembly, 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.
In support of the bill, the author writes:
Unlike California, more than twenty other states,
including Oregon, Washington, Colorado, Illinois, and
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Arizona, offer what is called a "Revocable Transfer on
Death" Deed. The tool is a nonprobate mechanism for
transferring property directly to one (or more)
beneficiaries. Under a TOD Deed, the property owner
retains full power and control over the property, and
the deed must be recorded to have effect. The owner
may revoke, at any point, the TOD Deed by executing
either another TOD Deed, thus naming a different
beneficiary, or by executing a revocation tool. Like
the TOD Deed, the revocation must also be recorded to
take effect. Operating in the same manner as a will,
the new TOD Deed does not transfer or create any new
interest in the property until the transferor's death,
which may not occur until years later. Furthermore,
unlike simply adding someone to the property title, a
TOD Deed does not create a new tax liability for the
beneficiary. Upon the owner's death, the title vests
in the beneficiary, subject to all interests affecting
the title to which the owner was subject (such as
Medi-Cal reimbursement).
Although other estate planning options are available
to property owners, the Revocable Transfer on Death
Deed is the most simple and inexpensive transfer
mechanism on the market today. Furthermore, it may be
the only tool available to unmarried homeowners who
wish to leave their property to a lifelong partner,
family member, friend or loved one upon death, but who
do not want to transfer present interest (such as
joint tenancy) or cannot afford to set up a trust.
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:
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(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
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
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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 eleven 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
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
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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
the 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 and About Half the States Allow RTDDs: In 2009,
the National Conference of Commissioners on Uniform State Laws
approved a uniform act on RTDDs. At that time, 13 states had
allowed some version of RTDDs. (National Conference of
Commissioners on Uniform State Laws, Uniform Real Property
Transfer on Death Act (2009).) Since that time, ten additional
states plus the District of Columbia have adopted some version
of the uniform act and at least another three states are
considering it this year. Thus nearly half of the states permit
use of RTDDs today.
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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
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 form 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
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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.
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
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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
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, one author of a
previous version of the bill 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
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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
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, 2020. The
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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, 2021.
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.
ARGUMENTS IN SUPPORT: In support of the bill, the Conference of
California Bar Associations writes:
AB 139 will be of particular benefit to 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. It also will be valuable to 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
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subject to statutory probate fees of likely 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 not. Other alternatives
generally suffer from problems of cost, complexity,
tax implications, irrevocability, or a combination of
all these issues.
ARGUMENTS IN OPPOSITION: 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, when used by transferors without advice
from legal counsel, could well create confusion and ambiguity
that could cloud the property's title.
REGISTERED SUPPORT / OPPOSITION:
Support
California Communities United Institute
Conference of California Bar Associations
Howard Jarvis Taxpayers Association
One individual
Opposition
California Escrow Association
California Land Title Association
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Analysis Prepared by:Leora Gershenzon and Khadijah Hargett /
JUD. / (916) 319-2334