Passing your home on to your heirs at your death seems like a simple concept, but when it requires a court process, it can get complicated and costly. The court process by which property is transferred from an estate to a living person is called a probate. California requires all estates with a value of $166,250 or more to go through a probate, unless specific estate planning steps are taken (Probate Code § 13151).
Probates are notorious for being time-consuming and expensive. Taking steps to avoid that process is simpler and generally more cost-effective than navigating the probate process itself. Depending on your assets and the size of your estate, as well as your plans for succession, the State of California provides more than one route to avoid probate.
Joint Ownership
If you intend to pass a property on to a specific person, you could consider adding that person to the deed as a joint tenant with you. Upon your death, provided you survive the joint tenant, he or she could update title by filing an affidavit with the county where the property is located. No probate would be required. The execution and recording of such a document is a very cost-effective and simple approach to avoid probate.
However, adding an additional person to your title may have some unintended consequences. The new joint tenant would own an immediate interest in your property. The joint owner would have all of the same ownership rights and responsibilities as you. In addition, the IRS could consider the new ownership interest to be a gift, for which a gift tax return may need to be filed. Another risk worth considering is if the joint owner were to get into tax debt, your property may be at risk of being attached to a tax lien. This method also lacks plans for contingencies. If your joint owner predeceases you and you do not record a new deed or have any other estate plan, then your property would be required to go through probate.
Transfer on Death Deed
Another simple method that could be used to avoid probate of your property would be to execute a revocable transfer on death deed (“TOD”). This type of deed is a relatively new concept, which went into effect in California on January 1, 2016. It may only be used for residential property that is not held in joint tenancy or community property with right of survivorship. When executed properly, a TOD will allow for the transfer of your property upon your death to the beneficiary named on the deed. Unlike joint ownership, this will not transfer any legal or equitable rights to the beneficiary until the transferor’s death. This is also a very simple and cost-effective way to avoid probate (Probate Code § 5600-5696).
A TOD has unique requirements. It must be recorded within sixty days of execution or prior to the transferor’s death. After the death of the transferor, the beneficiary must provide notice of the TOD, a copy of the TOD, and the transferor’s death certificate to all of the transferor’s heirs. The notice must give all heirs 120 days from the date of the notice to contest the terms of the TOD (Probate Code § 5681).
A TOD is not without risks. For instance, if the beneficiary listed on the TOD predeceases the original owner, then the TOD must be revoked. If no revocation is recorded and no other estate plan has been established, then the property would require probate. Another concern is that the property may be subject to Medi-Cal estate recovery if the owner used Medi-Cal benefits.
Revocable Trust
A slightly more complex method of estate planning to avoid the probate of your property is through a revocable trust. A revocable trust is a common estate planning tool used to hold assets and help facilitate their smooth transfer upon your death. This method would not be an immediate transfer of an interest to another person, nor is it limited to certain types of properties. A well-written revocable trust will include provisions that express your desires, with contingencies, for the transfer of your property upon your death. In addition, assets that pass via a trust estate are not subject to Medi-Cal estate recovery. When compared to joint ownership and a TOD, the revocable trust is the more expensive option, but it provides the most complete and customized plan for succession of your property while avoiding probate.
Taking steps to avoid probate is more straightforward and cost-effective than going through probate. When determining which path is right for you, it is important to analyze your specific needs, assets, the size of your estate, and the potential tax consequences. To avoid unintended consequences, it is best to speak with an experienced estate planner.
The Estate Planning Attorneys at Berliner Cohen, LLP would be happy to guide you through the process and provide you with an estate plan that fits your needs. Please contact Tiffany Scoggin at 209.385.0700 or tiffany.scoggin@berliner.com.