Transfer-on-Death Deeds in California: The 6 Main Issues They Can Cause

In 2016, the laws in California were updated to allow people with a home, condo, farm of 40 acres or less, or a multi-unit building with no more than four units to be designated on a property deed known as a Transfer-on-Death deed which the beneficiary of the property would be at the owner’s death. So, there was optimism that this would help property owners in California pass on their property with greater ease, but the law is fraught with legal Issues.

Although a transfer on death deed appears to have simplicity, there are many shortcomings. The first of which is that, if the named beneficiary dies before the property owner does, the deed becomes invalid. The property could then fall into probate upon the owner’s death. Transfer-on-Death deeds also do not allow for naming a contingent beneficiary on the deed like a trust document that owns the property does.

Secondly, if the intended beneficiary is a minor, the minor would not be able to manage or transfer the property until they reach the age of 18. There is also no way to name a custodian or trustee on a Transfer-on-Death deed like you can in a trust document. If a minor is named as the beneficiary on a Transfer-on-Death deed, a petition to the court would need to be filed in order to name a custodian on the property until the beneficiary reaches age 18. And as a sidenote, even if the beneficiary was 18 or close to age 18 and something happened to the property owner, do you really think it’s a good idea giving control of real estate to someone that young?

Thirdly, a California Transfer-on-Death deed provides no creditor protection, for the beneficiary from a would-be creditor, such as a divorcing spouse, other creditors, predators, or a bankruptcy trustee. These types of protections are available in a properly drafted trust that springs from the trust document for the beneficiary after the death of the trust grantor.

Fourthly, title insurance policies could be invalidated once the deed is recorded. Title insurance companies are also unwilling to issue a new policy for three years after a beneficiary inherits the property, which could cause all kinds of financial hardship issues. Imagine inheriting a property and not being able to sell it for three years and having to upkeep the property and not having the resources to do so.

The fifth issue here is that the one who inherits the property is personally liable for the original owner’s debts. This is to protect creditors of the decedent from being shortchanged by this estate planning shortcut.

And finally, as an update to the law in 2022, a beneficiary on a Transfer-on-Death deed is now required to mail notification of the original owner’s death to all heirs of the decedent, along with a copy of the death certificate and the Transfer-on-Death deed. This may require the beneficiary to perform an heir search, which could be problematic.