How Your Property is Titled Can Affect Your Estate Plan

Let’s say you own a house. And let’s say this house is titled in your name alone. If you have two children, and you want to bequeath the house to these two children upon your death, there are certain steps you should take to save money and protect your investments.

You may think it would be a good idea to list both of your children on the deed. This is rarely advised.

Here’s why:

First of all, anything that happens to either of your kids could put the property at risk. If your child has a drug problem, or a gambling habit, then you could potentially forfeit your real estate holdings to pay off their bills. If either child gets into an automobile accident, then the court could put a judgement lien on that child’s financial interest in the house.

Also, you may have specific wishes involving the future of the house after your demise — for example, for one child to live in the house, while the other receives business assets or liquid assets to cover the other child’s portion of the house. If the children are named on the deed, none of those wishes would work.

Estate Tax, Trusts and Probate

The biggest consequence to having your child’s name on the deed would be in the form of unforeseen gift tax or estate tax consequences. If either child did not contribute the same amount that you did to the house’s purchase, then you would be hit with a gift tax for either the year the home was purchased or the year it transferred ownership — or both years. And then, after your passing, the whole property value would be included in your estate, and subject to estate taxes.

Here’s a better idea: Create a Will and establish a trust. Your trust could specify exactly how you want property to transfer.

Another reason that you would want to establish a revocable trust is that you want to avoid probate fees.

For example, under California Probate Code, the attorney and personal representative of the estate each earn 4 percent on the first $100,000, 3 percent on the next $100,000 of the estate, 2 percent on the next $800,000, and on. The state uses the gross value of the estate, not the net value, to figure out these fees.

Your estate could easily rack up more than $40,000 in probate fees. And since the calculation is on the gross value of the estate, that calculation would not take your outstanding mortgage into account. It would just consider the portion of the house which you already own outright.

If you have a revocable trust, and then transfer the house to yourself as a trustee, you can avoid probate. Upon your death, a successor trustee (either of your children, for example) would then have the property transfer to her or him directly. The trustee that passes away — in this case, you — would not need to transfer the property. The trust would automatically transfer it.

The key to this, however, is making sure that the trust is fully funded at the time of your death. That is, the trust needs to have the property transferred into it formally. For this, you would want the assistance of a probate attorney. Donnellon, Donnellon & Miller can help you with any of these steps, and can answer any questions you may have.