Should I use a TOD Instead of a Trusts?
At Living Trust Advisor, we’re dedicated to helping Californians like you pass on your home or property to loved ones smoothly and cost-effectively. A Revocable Transfer on Death (TOD) deed is one tool to avoid the lengthy and expensive probate process, but it’s not the only option. A living trust offers another way to bypass probate with added benefits. Both have their place, but California’s Proposition 19 property tax rules, effective since February 16, 2021, add a layer of complexity that makes choosing the right tool critical. Below, we’ll explain what a TOD deed is, compare it to a living trust, highlight their pros and cons (including Prop 19’s impact), and share why a living trust may be the smarter choice for many California homeowners.
What Is a Revocable Transfer on Death Deed?
A Revocable Transfer on Death (TOD) deed lets you, as a property owner, designate one or more beneficiaries to inherit your residential property—like a single-family home, condo, or small agricultural property (under 40 acres)—directly upon your death. It skips California’s probate process, which can take 9 months to 2 years and cost 3-7% of your estate’s value. Authorized since 2016 under California Probate Code Sections 5600-5698, a TOD deed is fully revocable, meaning you can change or cancel it anytime while you’re alive, keeping you in complete control.
To execute a valid TOD deed in California, you must:
Sign the deed in front of two disinterested witnesses who can confirm they saw you sign or heard you acknowledge your signature.
Have your signature notarized.
Record the deed with your county recorder’s office (e.g., Los Angeles, San Diego, or Alameda County) within 60 days of signing. If you miss this deadline, the deed is invalid, and the property may go to probate.
What Is a Living Trust?
A living trust is a legal entity you create to hold assets—like your home, bank accounts, and investments—during your lifetime. You act as the trustee (manager) and name a successor trustee to take over if you become incapacitated or pass away. You also designate beneficiaries who inherit the assets after your death. By transferring property into the trust (e.g., re-deeding your home), the assets avoid probate and follow your instructions, offering flexibility and control.
How a TOD Deed Works: Naming Beneficiaries
With a TOD deed, you can name one or more beneficiaries, such as a person, a trust, or a legal entity, to inherit your property. Here’s what you need to know:
Multiple Beneficiaries: You can name multiple beneficiaries, but you must specify how they’ll hold title—either as joint tenants with rights of survivorship (if one dies, their share goes to the others) or tenants in common (each owns a separate share). All beneficiaries receive equal shares; you can’t assign different percentages.
No Contingent Beneficiaries: California’s TOD deed doesn’t allow backup beneficiaries. If a beneficiary dies before you, their share goes to the surviving beneficiaries. If none survive, the property may end up in probate.
Minors as Beneficiaries: If a beneficiary is under 18, they can’t manage or transfer the property until they reach adulthood, which may require a court-appointed guardian.
Advantages of a TOD Deed
Avoids Probate: A properly executed TOD deed transfers property directly to beneficiaries, bypassing California’s costly and time-consuming probate process.
Simple and Inexpensive: Creating a TOD deed typically costs $200-$500 with an attorney, making it a budget-friendly alternative to a living trust.
Revocable: You can change or revoke the deed anytime during your life without the beneficiary’s permission, keeping you in control.
Tax Advantages: Like a living trust, a TOD deed provides a “stepped-up” tax basis for beneficiaries (based on the property’s value at your death), minimizing capital gains tax on prior appreciation.
Private Transfer: The transfer is private, unlike a will, which becomes public during probate.
Disadvantages of a TOD Deed
Limited to Real Estate: TOD deeds only cover real property, not other assets like bank accounts or investments.
No Contingent Beneficiaries: You can’t name backups, risking probate if beneficiaries predecease you.
Equal Ownership Only: Multiple beneficiaries must receive equal shares, limiting customization.
Unsecured Debt Liability: Beneficiaries inherit the property subject to your unsecured debts (e.g., credit card or medical bills) up to the property’s value for three years after your death. This is a key difference from a living trust.
Medi-Cal Recovery Risk: If you received Medi-Cal benefits, the state can pursue recovery from the property, reducing what beneficiaries receive.
Title Insurance Issues: Title companies may hesitate to issue insurance for three years after your death due to debt liability, complicating sales or refinancing.
No Incapacity Planning: TOD deeds only work after death and don’t address property management if you become incapacitated.
No Creditor Protection: Beneficiaries receive the property outright, leaving it vulnerable to their creditors, lawsuits, or divorce claims.
The Big Gotcha: Secured vs. Unsecured Debt
When beneficiaries inherit property, they typically take on any secured debt, like a mortgage, whether through a TOD deed, trust, or probate. A mortgage is “secured” by the property, meaning non-payment could lead to foreclosure. However, a TOD deed uniquely exposes beneficiaries to your unsecured debts (e.g., credit cards, medical bills), which aren’t tied to the property. Under California law, creditors can pursue these debts against the property’s value for up to three years after your death. For example:
If you owe $50,000 in medical bills and the property is worth $500,000, beneficiaries could lose value to cover those debts.
Medi-Cal Recovery: If you received Medi-Cal benefits (e.g., for long-term care), the state can claim reimbursement from the property, unlike with a properly structured living trust.
This debt liability can also make title insurance companies reluctant to issue policies, creating hurdles for beneficiaries trying to sell or refinance.
Advantages of a Living Trust
Avoids Probate: Like a TOD deed, a living trust bypasses probate, ensuring a fast, private transfer of assets.
Comprehensive Asset Coverage: Trusts can hold real estate, bank accounts, investments, and more, creating a complete estate plan.
Incapacity Planning: If you become incapacitated, your successor trustee manages the trust’s assets, avoiding court intervention.
Creditor and Debt Protection: Trusts can shield assets from beneficiaries’ creditors, lawsuits, or divorce claims and often protect against Medi-Cal recovery.
Flexible Beneficiary Options: You can name contingent beneficiaries, assign unequal shares, or set conditions (e.g., distributions at certain ages), reducing disputes.
No Unsecured Debt Liability: Beneficiaries generally don’t inherit your unsecured debts, as the trust separates assets from your personal estate.
Disadvantages of a Living Trust
Higher Upfront Cost: Setting up a living trust costs $1,500-$3,000 with an attorney, more than a TOD deed.
Complex Setup: You must transfer assets into the trust (e.g., re-deeding your home), which takes more effort than a TOD deed.
Ongoing Management: Trusts require updates if your assets or beneficiaries change, adding some administrative work.
Proposition 19: How It Affects TOD Deeds and Living Trusts
Proposition 19, effective February 16, 2021, changed California’s property tax rules for inherited real estate, impacting both TOD deeds and living trusts. Before Prop 19, parents could transfer their primary home and up to $1 million in assessed value of other property to their children without triggering a property tax reassessment, preserving the low Proposition 13 tax base. Prop 19 tightened these rules:
Primary residences: The home must be your primary residence, and the child must use it as their primary residence (filing a Homeowner’s Exemption within one year) to qualify for a tax exclusion. The exclusion is capped at $1 million above your assessed value (adjusted biennially). If the home’s value exceeds this, partial reassessment applies.
Non-primary residences: Second homes or rental properties are reassessed at current market value upon transfer, often leading to higher taxes.
Timing: Applies to transfers on or after February 16, 2021.
TOD Deeds and Prop 19
Pros:
Simple Tax Exclusion: If the property is your primary residence and the beneficiary (e.g., your child) uses it as their primary home, they can qualify for the Prop 19 tax exclusion, keeping taxes low.
Cost-Effective: The low cost of a TOD deed makes it appealing for straightforward transfers of a primary home.
Cons:
No Tax Strategy Flexibility: TOD deeds offer no way to manage reassessments for non-primary residences or properties exceeding the $1 million cap, potentially leading to high tax bills.
Medi-Cal Exposure: The property remains vulnerable to Medi-Cal recovery claims, which Prop 19 doesn’t address but can reduce what beneficiaries receive.
Living Trusts and Prop 19
Pros:
Tax Planning Flexibility: Trusts allow you to structure transfers to maximize Prop 19’s exclusion (e.g., designating the primary residence for a child who will live there) and explore options like gifting or sub-trusts to manage reassessments on other properties.
Medi-Cal Protection: A properly structured trust can often shield assets from Medi-Cal recovery, preserving more for your heirs.
Comprehensive Approach: Trusts cover multiple assets, allowing a cohesive plan to address Prop 19 across your estate.
Cons:
Higher Costs: The upfront cost of a trust is higher, though it may save money long-term by minimizing taxes and claims.
Setup Complexity: Ensuring Prop 19 compliance requires careful drafting, such as specifying the primary residence.
Why a Living Trust May Be Better in California
While a Revocable TOD deed is simple and affordable, a living trust often comes out ahead for California homeowners, especially under Proposition 19. Here’s why:
Prop 19 Tax Strategy: Trusts offer flexibility to navigate Prop 19’s rules, such as prioritizing the primary residence exclusion or structuring transfers to minimize reassessments on other properties. TOD deeds lack this control, risking higher taxes.
Comprehensive Planning: Trusts cover all assets—not just real estate—ensuring your entire estate avoids probate and aligns with your wishes.
Incapacity Protection: If you become incapacitated, a trust lets your successor trustee manage assets, unlike a TOD deed, which only works after death.
Debt and Creditor Protection: Trusts shield beneficiaries from your unsecured debts and Medi-Cal recovery claims, and they can protect inherited assets from beneficiaries’ creditors, lawsuits, or divorces. TOD deeds expose beneficiaries to these risks.
Customizable Beneficiary Options: Trusts allow contingent beneficiaries, unequal shares, and conditions, preventing disputes and probate risks that TOD deeds can’t avoid.
Long-Term Savings: Despite higher upfront costs, trusts save thousands by avoiding probate fees, Medi-Cal claims, and potential tax reassessments, making them a smarter investment for many.
How to Choose: TOD Deed or Living Trust?
Choose a TOD Deed If: You have a single primary residence, a simple estate, and a trusted beneficiary who will use the home as their primary residence to qualify for Prop 19’s tax exclusion. It’s ideal for low-cost, straightforward plans.
Choose a Living Trust If: You have multiple assets, want incapacity protection, need to manage Prop 19’s tax rules, or want to shield beneficiaries from debts and creditors. Trusts offer more control and long-term benefits.
Next Steps in California
For a TOD Deed: Use California’s official TOD deed form, sign it before a notary with two witnesses, and record it within 60 days. Consult an attorney to avoid mistakes.
For a Living Trust: Work with an estate planning attorney to draft a trust, transfer assets (e.g., re-deeding your home), and address Prop 19 and Medi-Cal concerns.
At Living Trust Advisor, we believe a living trust often provides the best balance of flexibility, protection, and tax planning for Californians navigating Prop 19 and complex estate needs. Visit livingtrust-advisor.com for more resources or contact an estate planning expert to craft your legacy plan.