BILL ANALYSIS Ó AB 1779 Page 1 Date of Hearing: May 3, 2016 ASSEMBLY COMMITTEE ON JUDICIARY Mark Stone, Chair AB 1779 (Gatto) - As Introduced February 3, 2016 PROPOSED CONSENT (As Proposed to be Amended) SUBJECT: Nonprobate revocable transfer on death deed: Law Revision Commission study KEY ISSUE: Should aN EXISTING CALIFORNIA LAW REVISION STUDY OF THE five-year PILOT of the "REVOCABLE TRANSFER ON DEATH DEED" (rtdd) - WHICH ALLOWS AN OWNER of real property to transfer THAT property on death outside of probate through an RTDD - be expanded TO ALSO STUDY WHETHER IT IS APPROPRIATE TO INCLUDE OTHER TYPES OF PROPERTY AND OTHER TYPES OF OWNERSHIP IN rtdd transfers? SYNOPSIS For the last 10 years, an assortment of legislators have tried to create a simplified process to transfer real property outside of probate and without use of a trust. (AB 250 (DeVore, 2007), AB 724 (DeVore, 2009-10), AB 699 (Wagner, 2011).) All of those efforts were unsuccessful until last year's AB 139 (Gatto, Chap. 293, Stats. 2015), which finally established a five-year pilot program allowing owners of real property, until January 1, 2021, AB 1779 Page 2 to transfer their property upon death, outside the normal probate procedure, through a written instrument known as a "revocable transfer upon death deed" (RTDD). Given concerns about misuse of the RTDD, the Legislature directed the California Law Revision Commission (CLRC) to study the RTDD pilot program and report to the Legislature by January 1, 2020 on how it is operating. The current RTDD process is relatively limited in both what types of property can be transferred and what entity can take ownership of the property. This bill seeks to expand the CLRC study to consider other types of property to be transferred and other types of entities that may take ownership of the property. There is no known opposition to the bill as proposed to be amended. SUMMARY: Expands the California Law Revision Study of the revocable transfer on death deed (RTDD) pilot program. Specifically, this bill requires the California Law Revision Commission, as part of its study of the RTDD, to address whether it is feasible and appropriate to expand the RTDD to include (1) transfers of stock cooperatives or other common interest developments and (2) transfers to a trust or other legal entity. EXISTING LAW: 1)Allows an interest in certain residential real property to be transferred on death by recording an RTDD signed and acknowledged by the record owner of the property, with the capacity to contract, and designating a beneficiary or beneficiaries. The deed transfers ownership of that property interest upon the death of the owner. The pilot program 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 AB 1779 Page 3 January 1, 2021, but any RTDD properly executed before that date remains valid and may be revoked after that date. (Probate Code Section 5600 et seq. Unless stated otherwise, all further statutory references are to that code.) 2)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. (Section 5650.) 3)Provides a statutory form RTDD and requires that an RTDD must be in a substantially similar form. The statutory deed provides information to the transferor, including explaining how the RTDD works, how it is effectuated and some of its consequences. (Section 5642.) 4)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. (Sections 5670-76.) 5)Permits contest of the RTDD for, among other things, lack of capacity to transfer, transfer to a disqualified person, fraud, duress, and undue influence. (Sections 5690-96.) 6)Requires the CLRC to study the effects of the RTDD and make recommendations to the Legislature by January 1, 2020. (AB 139 (Gatto), Chap. 293, Stats. 2015, Section 21.) 7)Defines "person" for purposes of the Probate Code to be an individual, corporation, government or governmental AB 1779 Page 4 subdivision or agency, business trust, estate, trust, partnership, limited liability company, association or other entity. (Section 56.) FISCAL EFFECT: Unknown. COMMENTS: For the last 10 years, an assortment of legislators have tried to create a simplified process to transfer real property outside of probate and without use of a trust. (AB 250 (DeVore, 2007), AB 724 (DeVore, 2009-10), AB 699 (Wagner, 2011).) All of those efforts were unsuccessful until last year's AB 139 (Gatto, Chap. 293, Stats. 2015), which finally established a five-year pilot program allowing 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." Because of significant concerns about the effect of the RTDD and its likelihood of creating confusion, impact on Medi-Cal reimbursement and, most importantly, creating new opportunity for fraud and elder abuse, the bill was limited to transfers of only certain small amounts of property and the beneficiaries and how they take the property was similarly limited to keep the program as uncomplicated as possible to truly help those who are likely house-rich, but otherwise have no need for estate planning. In addition, the bill limited the impact to just a five-year pilot with directions for the California Law Revision Commission to study the impact of the RTDD and report its findings and recommendations back to the Legislature by January 1, 2020. This bill seeks to expand the CLRC study to include analysis about whether it is feasible and appropriate to expand the RTDD to include (1) transfers of stock cooperatives or other common interest developments and (2) transfers to a trust or other legal entity. The author believes that expanding the RTDDs this way could help more people avoid probate, "a lengthy legal AB 1779 Page 5 process that involves proving in court that a deceased person's will is valid, inventorying and appraising property, and paying debts and taxes. The process is often grueling and can take up to a year." Initial California Law Revision Commission Study: As directed by the Legislature, the CLRC conducted an initial study to determine whether an RTDD should be statutorily created in California. (CLRC, Recommendation: Revocable Transfer On Death (TOD) Deed (Oct. 2006).) At the time of that initial study, nine other states, including Colorado, New Mexico, Ohio and Wisconsin, statutorily recognized 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. In recommending creation of an RTDD in California, the CLRC balanced the generally positive, although quite limited, experience of other states and the need for a simple, low-cost method of conveying real property with the very real concerns that a RTDD could be abused and could help facilitate fraud on the transferor or his or her intended beneficiaries and, because it is so simple to use, it could be used inappropriately, without advice of counsel. In order to address some of these 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. Last year's AB 139 allowed for use of RTDDs and created a statutory form with instructions for easy use without an attorney. After a decade of attempts, last year's AB 139 established a pilot, five-year pilot program allowing owners of certain real property, until January 1, 2021, to transfer their property upon death, outside the normal probate procedure, through a written RTDD. That bill also created a statutory RTDD AB 1779 Page 6 form to help ensure that property owners who do not seek legal counsel may be able to successfully transfer property through use of an RTDD. The statutory form 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. 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. When last year's pilot was passed, there was concern that the RTDD might have the unintended consequence of steering persons away from legal assistance that they may need, and therefore last year's bill was appropriately limited and a CLRC study required. 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 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. A simplified RTDD can also make it easier to commit financial abuse. Seniors could sign without realizing what they were signing or its AB 1779 Page 7 consequences. In recognition of the risks associated with an RTDD, AB 139 directed the CLRC to study the effect of the RTDD in California and report back to the Legislature by January 1, 2020. 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. AB 139 also contained a January 1, 2021 sunset. RTDDs executed before that time would remain valid, but RTDDs executed after that date will not be valid. This sunset, together with the study by CLRC, help minimize risks of abuse or misuse associated with the RTDD, but may not prevent such risks during the five years that RTDDs would be valid in California. This bill expands the CLRC study. This bill expands the CLRC study to address whether it is feasible and appropriate to expand RTDDs to include (1) transfers of stock cooperatives or other common interest developments and (2) transfers to a trust or other legal entity. Certain common interest development property may not be owed as real property but may in fact be owned in some other fashion, such as stock in the housing cooperative. This bill directs CLRC to study whether the pilot program should be expanded to include transfer of these types of property. AB 1779 Page 8 This bill also directs CLRC to study whether the law should be explicitly expanded to include transfer to someone other than an individual. Currently, an RTDD may be used to transfer property to a beneficiary, defined as a person named in a RTDD as the transferor of the property. (Section 5608.) However, the Probate Code more generally defines person as "an individual, corporation, government or governmental subdivision or agency, business trust, estate, trust, partnership, limited liability company, association, or other entity." (Section 56.) Thus it is arguable that the existing pilot RTDD already permits transfer of property to trusts or other legal entities. This bill ensures that whether it is indeed appropriate to be so inclusive is fully studied. REGISTERED SUPPORT / OPPOSITION: Support (as proposed to be amended) None on file Opposition (as proposed to be amended) None on file Analysis Prepared by:Leora Gershenzon / JUD. / (916) 319-2334 AB 1779 Page 9