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The Trouble with Gift Deeds

People make gifts of their property for any number of reasons – charitable, out of "love and affection" for a family member, to benefit or to cut out a spouse, or to avoid estate taxes. By and large such gifts are not problematic. Other persons may feel envy or insult, but the law does not care about such hard feelings. However, when the recipient of the gift is a stranger – and especially when the recipient bears a confidential relationship with the donor (such as an attorney or a fiduciary) – then the gift deed may prove toxic.

The California Probate Code places restrictions on what the statutes call a "donative transfer." That term translates to "gift" in plain English. The giver is the "donor." If the person receiving the gift (the "donee") happens also to be the person who drafted the deed, then the statutes may invalidate the transfer. The statute creates a conclusive presumption that the transfer arose as a result of fraud or undue influence. The result may be that the transfer becomes void.

A recent case decision examined past and current law on donative transfers; and the case illustrates the inherent perils of a gift to a stranger. In Jenkins v. Teegarden (October 23, 2014) the appellate court invalidated a quitclaim deed transferring real property to the donor's caregiver, even though the donee had paid money for the deed. In a case of first impression, the court required not simply that consideration be given for the deed, but that the consideration be fair and adequate. In practice, that means that the consideration in monetary terms must be close to fair market value.

The facts of the Jenkins case are familiar. We have the usual cast of characters: The donor was an elderly widower who employed several caretakers. One of them was a woman, describing herself as a friend, to whom the donor had previously lent money and with whom he had invested in construction of a new home. This caretaker contributed $100,000 towards construction of the home. The donor owned the lot on which the home was constructed through his living trust. His stepdaughter held the position of trustee of the trust.

As you might guess, the stepdaughter did not get along with the caregiver. So that bad relationship created a recipe for trouble. The widower decided to give the Lawton home to the caregiver so that she would have a place to live in the future and so she could continue to take care of him. Another friend advised him not to do it but he did it anyway.

The caregiver went to Staples and bought a blank quitclaim deed. She then filled it out making a series of mistakes – not naming the trust as transferor, attaching an incorrect legal description, and stating the consideration to be one dollar. The deed was recorded in the Official Records nonetheless with all of its defects. (Contrary to popular belief, the Count Recorder does not examine the content of the deed for legal correctness.)

Predictably the stepdaughter sued the caregiver in order to void the deed and restore title to the trust. (Although the court's opinion does not say this explicitly, the stepdaughter likely stood in line to inherit the property.)

The appellate court interpreted the statutes as they existed before 2011 and as amended effective January 1, 2011. The court grappled with the troublesome fact that the caregiver had actually contributed $100,000 towards construction of the home; she was not relying upon "friendship" alone plus a nominal payment of one dollar. The home was worth $480,000 without dispute. Do the statutes apply only to transfers for essentially zero consideration, or do the statutes apply to transfers for anything less than fair and adequate consideration?

The court chose the latter alternative. In doing so, the court borrowed the test used in lawsuits for "specific performance"; that is, cases where a prospective buyer sues the seller to force the seller to convey the property as required by their purchase agreement. While the law does not tell us at what point on the spectrum consideration makes the transition from unfair and inadequate to fair and adequate, the case law tends to indicate that the point of transition is not very far below current market value.

Of course — and this is the real puzzle --- a transfer for fair and adequate consideration does not sound like a gift at all. It resembles a purchase and sale. Someone who sincerely wishes to make a gift of his property to a stranger would not think to demand that the stranger pay full price for the property. That is plain common sense.

How then to sanitize the transfer? The statute says that the transfer will survive if the deed "is reviewed by an independent attorney" in advance. This may sound like a commercial plug for real estate attorneys. Maybe it is. But it is also a sure way to make a gift that does not get returned unexpectedly by a court.

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