Joint Tenancy or California’s new “Transfer on Death Deed” May Help with Do-It-Yourself (DYI) Planning, But It Is Easy to Make Mistakes.
Existing law allows a “joint tenancy with right of survivorship” deed (“JTWROS”), which gives two or more persons current ownership of property that then passes to the surviving owner(s) upon the death of one of them. Many spouses hold title as JTWROS, which is usually not a problem. But some people use JTWROS to put one or more of their children on title as a do-it-yourself estate planning effort.
California has passed a new law, effective in January 2016, allowing a person to designate a beneficiary to receive their home when the owner dies that differs from the JTWROS.
Despite this new option, neither form of deed is a substitute for a good estate plan.
Using a JTWROS as an Estate Planning Mechanism is Risky!
A JTWROS deed is not suitable for everyone and, in most cases, naming your children on the deed to your home is a very bad idea. Among other things:
- The named heirs own part of your property
- They have the power to keep it for themselves when you die, even if you intended that they share it with other family members
- You need their permission to sell it or give it to someone else
- They have to sign for any new loans against the property
- It’s a present gift that you cannot undo unless they gift it back to you
- It may require a gift tax filing
- The heirs know about the gift during your lifetime
- It puts the property at risk for collection by the creditors of the heir
- If all persons named on the deed die before you, then the gift will cancel and the property will have to be probated in court. In California, probate is a very tedious, expensive, and long process.
- If one of the other owners dies, the property automatically passes to the survivors, not to the deceased owner’s estate or family.
- Any of the named owners can “sever” the right of survivorship, causing their share of the property to pass to someone other than the owners named on the deed.
- The JTWROS deed will control how your property passes when you die, not your Last Will and Testament (unless you are the last surviving owner).
The new Transfer on Death Deed (“TODD”) differs from JTWROS, But Still May Not Be the Right Choice.
A. The TOOD Cures Some of the Risks in Using a JTWROS Deed.
The biggest difference between a JTWROS deed and a TODD is that the TODD does not pass a current ownership interest to the intended heirs. This is a big difference! Advantages of the TODD over the JTWROS include:
- No ownership interest is passed until your death, so no permission is needed to sell the property, change the gift, or get a loan. No tax filing is necessary. No creditors of the heir can reach collect from your own property.
- You can change the identity of the recipient heir at any time until your death or incapacity
- The heir does not need to be informed of the gift before you die.
B. Warning! The TODD Is More Difficult to Use and It’s Easier to Make a Mistake.
Before you rush to the county recorder to use the TODD, be warned! There are several technical requirements that make it easy to mess up. There are disadvantages that is shares with the JTWROS deed. And there are limits to what it can do. In the end, the TODD may not perform in the way you expect. For example:
- You must name specific beneficiaries to inherit the property. For instance, you
cannot say “my children,” or “any grandchildren I may have at my death.” You have to use specific names.
- If a person you named dies before you, the gift will not pass to that person’s children. Instead, it will first pass to the other heirs named as beneficiary.
- If all persons you named die before you, then the gift will cancel and the property will have to be probated in court. In California, probate is a very tedious, expensive, and long process.
- The TODD must be recorded within 60 days. If you wait longer than that, the deed is void.
- The TODD cannot be used to transfer joint tenancy property with right of survivorship OR community property with right of survivorship. The survivorship interests on those titles take precedence over the TODD.
- The TODD can only be changed by recording a new deed or a formal revocation of the old one. Providing for a different gift of your property in your Last Will and Testament will not revoke a TODD.
- A TODD cannot be used for commercial property or vacant land.
- A TODD can only be used for residential property having one to four dwelling units, or up to 40 acres of farmland with a dwelling unit on the property.
- Many title insurance companies are hesitant to insure title until three years have passed since the grantor’s death. This could delay the beneficiary’s ability to sell or borrow against the property after it is inherited.
A JTWROS or TODD Is Not the Right Choice for Most People.
Other than passing property to your spouse, neither a JTWROS nor a TOOD is going to be the right choice for most people. There is significant risk that your property will still wind up in court, and may pass to someone you did not intend.
You at Least Need a Will If…
If you want to accomplish the following, you at least need a Will:
- If your child dies before you, you want his/her share to pass to your grandchildren
- You have more than one heir and you want the property to pass in unequal shares
- You have a JTWROS deed with your spouse, but want to plan for the possibility that you and your spouse may die together
- You have commercial property or vacant land
- You do not want the State or Court to decide who inherits your property if all persons named on the deed die before you
You Should Have a Trust If…
For most things people want to accomplish, a living trust is the best answer. There are many advantages to setting up a trust. To name just a few, with a trust you can:
- Protect heirs from getting too much at once
- Protect heirs from losing their inheritance to creditors or divorcing spouses
- Provide for management of your property during your incapacity
- Avoid the California court system
- Ensure that your property does not pass to your spouse’s new mate if you die first
- Name beneficiaries and make changes without have to record documents in the county public records
- Direct that property be sold and the proceeds divided to specific heirs after costs of sale
- Direct that property be kept for future family use and provide instructions governing use and payment of expenses
- Keep property for the use of minor children, then leave it to someone else once they are grown
- Restrict the use of an inheritance to specific purposes, such as paying for education
- Planning for an heir with special needs
- Planning for the care of pets
Don’t be penny-wise and pound-foolish. Do-it-yourself almost never works without problems. Spending some money up front to setup a good estate plan ultimately saves time, money, headaches, and heartache down the line.