Many of you may have heard about California allowing property owners to designate a “Transfer on Death” designation to automatically transfer ownership of a piece of real property as of January 1, 2016. This new “Transfer on Death” deed works a lot like a “Payable on Death” designation on a bank or other financial account where you label beneficiaries to get the funds in that particular account in the event of your death. Using these types of designations can help individuals and love ones avoid probate, as the assets transfer to the beneficiary upon presentation of a death certificate rather than by court order or process.
Although the transfer of death designation can help families avoid probate (a very good thing, by the way), you should understand the potential drawbacks of using such devices.
For example, receiving property, whether real estate or other personal assets, by a beneficiary designation, the beneficiary will get the property free and clear of any restrictions. In a living trust, for example, you can create specific provisions to protect a young beneficiary from themselves by limiting distributions or making outright distributions at specific ages when they will likely be more mature. Nowadays, a major concern with families is kids getting involved with divorces and the other spouse eating up your gift meant for your kids. Although inherited property is not treated as community property in California, in reality, when couples get a big cash payout, for example, inherited money often gets comingled with community property. Many times, it is unclear what money is what, and thus the big cash payout gets eaten up in a divorce. With regard to real property upon divorce, a child may get a property outright, which wouldn’t be subject to division on divorce. But what happens if you use money belonging to both spouses to improve the property or maintain the property? The other spouse could be making claims of reimbursement and claims for a portion of any appreciation. A good trust plan could set up a trust on behalf of a child to avoid some of these types of claims.
These are some of the things you need to keep in mind when planning your estate and passing on your hard earned wealth.
