(Editor’s Notes: Lauren Murvihill is a summer associate at Downey Brand. She is a student at UC Davis School of Law.  In September 2021, after publication of this post, the Governor approved Senate Bill 315.)

The thrifty do-it-yourselfers among us might jump at the opportunity to transfer their family home to their kids while avoiding probate and the expense of creating a trust.  Revocable Transfer on Death Deeds, or RTODDs, have allowed for this type of non-probate transfer in California since 2016.

SB 315, now in the California Assembly having already passed in the Senate, will modify the Probate Code provisions that govern RTODDs.  The bill aims to protect transferors from vulnerabilities and uncertainties when executing an RTODD.  Will SB 315 change California law for the better by hindering fraud and financial elder abuse?

How Does the Current Statute Work?

Currently, as defined in Probate Code section 5614, a Revocable Transfer on Death Deed transfers ownership of real property to a named beneficiary upon the transferor’s death.  This transfer occurs independently of a will, trust, or probate proceeding.  Per Section 5652, the beneficiaries of an RTODD must receive equal shares of the real property.

RTODDs do not permit contingencies, alternative beneficiaries, or unequal beneficiary shares. The real property being transferred via RTODD must also meet certain requirements set forth in Section 5610.  Only three categories of real property can be transferred: (1) property with one to four residential dwelling units, (2) a condominium, or (3) a single tract of agricultural property of up to 40 acres that is improved with a single-family residence.

At first, nothing happens when someone is named a beneficiary of an RTODD.  Rather, as stated in Section 5650, the beneficiary does not gain ownership of the real property until the transferor has died.

The transferor is responsible for paying the mortgage, taxes, and other fees relating to the real property during their lifetime.  Once the transferor dies, the named beneficiary becomes responsible for these payments and other debts the transferor accumulated during their lifetime, as set forth in Section 5672.

RTODDs are revocable, so transferors can change their terms before they die or revoke the RTODD completely.  However, the onus falls on the transferor to remember to make and effectively complete such changes.

A transferor can make mistakes that could invalidate the RTODD if not corrected during the transferor’s lifetime.  For example, what happens if a transferor tries to leave the family home 2/3 to Daughter and 1/3 to Son?  What if the legal description listed in the RTODD is incorrect or the transferor’s name is different than the deed that vested title in the transferor?

Under current law, these types of errors can void an RTODD entirely.  Because of how new RTODDs are in the state, there is currently no guidance from California courts regarding whether and how to fix errors in RTODDs.  If a transferor realizes during their lifetime that they made an error, they can revoke the RTODD and execute a new one to fix it.  However, if a beneficiary discovers the error after the transferor has died, it is unclear what the beneficiary can do to still receive the property.  In these situations, the RTODD may be deemed invalid.

What Would SB 315 Change, and Why?

SB 315, if enacted, will provide some guidance on how a court may resolve certain errors contained in an RTODD.  For example, if a transferor makes an error or creates some ambiguity when executing an RTODD, those mistakes do not invalidate the RTODD if a court can determine the transferor’s intent.

As the law currently stands, Californians are not afforded many protections when executing an RTODD.  This opens them up to vulnerabilities.  In November 2019 the California Law Revision Commission (CLRC) published a study providing recommendations that would protect people who transfer their real property through RTODDs.  SB 315 enshrines all of these recommendations.  SB 315 will make RTODDs safer mechanisms to transfer real property, but they still will not be fail-proof.

Some of the recommendations that the CLRC made include requiring that an RTODD be witnessed, requiring that an RTODD beneficiary give notice to the transferor’s heirs when the transferor dies, and presuming that if a beneficiary of an RTODD also signs as a witness, the RTODD is the product of fraud or undue influence.  These recommendations do not eliminate all loopholes that people with bad intentions can utilize to thwart a transferor’s intent.

Fraudsters can use RTODDs to perpetrate fraud, undue influence and financial elder abuse to gain title to real estate.  Elderly people and those with diminished mental capacity are the most at-risk of being tricked or pressured into disinheriting chosen beneficiaries in favor of a conniving transferee.

Moreover, RTODDs are very easy to execute, requiring someone to merely fill in some blanks, sign, and notarize.  That makes them easy tools to use to commit fraud.  Although SB 315 would enact several protections to combat fraud and undue influence, these protections are not perfect.

For example, SB 315 would require two witnesses to sign an RTODD in addition to having it notarized.  Witnesses may help determine whether the transferor had sufficient mental capacity and was not under undue influence, but a fraudster who fakes notarization will not hesitate to add forged or phony witness signatures or to conspire with two witnesses to orchestrate a fraud.

Requiring witnesses to sign an RTODD may be a marginal improvement, but adding this step could also lead to more errors that invalidate RTODDs.

The CLRC identified several out-of-state cases that highlight the risk of fraud and undue influence that come with RTODDs.  Of the seventeen reported cases (all outside California) that the CLRC found in which an RTODD was contested on grounds of fraud, undue influence, or transferor incapacity, the allegations were proven in six.

Although the CLRC did not find any evidence to suggest that an RTODD is more susceptible to abuse than any other instrument that transfers real property, RTODDs have only been legal in California for the past five years.  That is not enough time to determine their safety or reliability.  The CLRC has asked for another ten years to conduct a second follow-up study regarding the impacts and consequences of RTODDs.

Takeaways

RTODDs may seem convenient, but they can fail if not properly prepared and can be an instrument of fraud.  In the alternative to an RTODD, hiring an estate planning attorney to include real estate and other assets in a customized trust is a sounder way to pass property without probate.  Trusts also facilitate property management in the event the owner becomes incapacitated.

Transferor beware!  Anyone interested in using an RTODD should review and follow the statutory requirements carefully, including those in SB 315, which is likely to be enacted in 2021 and to take effect on January 1, 2022.