Although the California Law Revision Commission first recommended TOD Deeds in 2006, the California legislature did not authorize them until January 1, 2016. Just after the one-year anniversary of the new TOD Deed law, the Commission issued Memorandum 2017-6 on January 9, 2017.
Background: The Importance of Title Insurance in Real Estate Transfers
Before we discuss the actual points raised in the Memorandum, it is important to understand the context. Title insurance agencies (title companies) are a critical part of the property transfer process. The failure to meet title insurance underwriting guidelines makes title to the property unmarketable, meaning that the property can be difficult or impossible to sell. Unmarketable title greatly reduces the value of property. The only way to fix title issues is through legal documents or proceedings, which can be very expensive.
Because title insurance is an important part of most real estate transactions, it is important to handle real estate transfers in a way that does not make title unmarketable. Title insurance requirements are often as important as legal requirements. This is true even when the title companies take a position that is not supported by the law. If, for example, all title companies in a given state decide that they will not insure title on property transferred by TOD Deed, then TOD Deeds would become relatively worthless, even if they are clearly authorized by state law.
Memorandum 2017-6 and Transfer-On-Death Deeds
With that background in mind, we can look at the specific concerns addressed by the Memorandum. The Memorandum was issued in response to an inquiry received from a title insurance agent regarding the insurability of TOD Deeds. The title agent pointed out that each TOD Deed form set forth in the statute includes two parts:
- The TOD Deed itself, including the legal description and the names of the owner and beneficiaries; and
- A Frequently-Asked-Questions (FAQ) section titled COMMON QUESTIONS ABOUT THE USE OF THIS FORM, which contains information intended to help laypersons understand the TOD Deed.
California law requires both of these components to be recorded in substantially the same format that they are presented in the California statutes. According to the title agent, many do-it-yourself deed preparers are not recording the FAQ section. The title agent further claimed that attorneys and the Butte County Recorder were advising deed preparers that the FAQ section did not need to be recorded. The title agent and his underwriters believe that, if the FAQ section is omitted, “the documents [sic] legality is questionable and potentially uninsurable.”
The Memorandum notes that some attorneys, the local recorder’s office, and the Sacramento County Public Law Library all seem to think that the FAQ section did not need to be recorded for the deed to be valid. Based on this fact alone, one may question whether the agent’s underwriters are correct in their interpretation that the FAQ section must be recorded. But, as stated above, it may not matter. If a title insurance company will not insure title, then the property may be unmarketable even if the title company has no good legal reason for its decision.
The Memorandum recommends that the California legislature amend the Revocable Transfer-On-Death Deed statute clarify whether the FAQ section must be recorded. It notes both pros and cons of the requirement. On the pro side, recording the FAQ section would increase the likelihood that the transferor understands the effect of the TOD Deed and knows how to properly sign and deliver it. If the California legislature makes this a clear requirement, the Commission recommended that any recording requirement be clearly stated in the instructions to the TOD Deed.
The Memorandum notes two significant drawbacks to adding a requirement that the FAQ section be recorded.
- If the legislature amends the law to require that the FAQ section be recorded, the requirement could invalidate the TOD Deeds that were filed without the FAQ section before the law was amended. Because the transferor (who is often not an attorney) would probably never learn that the law was amended, there would be no opportunity to correct the mistake before the transferor’s death.
- Any strict recording requirement increases the risk that the TOD Deed will be invalid. That is always true, but especially in situations where laypeople are preparing their own legal documents. Although the deed could require the transferor to check a box stating that he or she understands that the FAQ section must be recorded, the Memorandum notes that “some level of error seems inevitable.”
The Memorandum also suggests that the law be amended to simply state that recording or failing to record the FAQ section does not affect the validity of the document. In our view, this is the better approach. It would reduce the risk that consumers would accidentally file invalid documents. Because recording fees are based on page count, omitting the instructions could save consumers from paying unnecessary recording fees for each deed. It makes no sense to require recording of a set of instructions that has no legal effect. We believe that this is a case of title insurance companies being overly conservative, and such an instruction would provide clearer guidance to these companies.
As we wait for clarity from the California legislature, the best approach is to record the full FAQ section with every California TOD Deed. This simple step will eliminate any risk associated with failure to record the FAQ section.
The Memorandum can be read at http://www.clrc.ca.gov/pub/2017/MM17-06.pdf. For more information, see our discussion of California Revocable Transfer-on-Death Deeds. If you are ready to create your own California TOD Deed, our Deed Generator can help you create a customized document and instructions.