As a long-time estate planning attorney, I counsel many couples in creating an estate plan or living trust in California. Most parents want to protect their children, as well as create a legacy that can be carried on for generations to come. However, the documentation required in an estate plan can vary depending upon a family’s specific needs and assets. A living trust in California can be tricky, especially with Prop 58 considerations (retaining the same real property taxes).
A Living Trust in California
In California, our properties simply cost more than in most other areas of the country. Clients typically want to keep this valuable real estate asset within the family. So, some parents, out of love and desire to leave this legacy, place their kids on title to the family home. By doing this, they are unwittingly creating more problems. It actually opens a window of liability that did not exist before the transfer of title.
At Risk of Children’s Creditors
Creditors seeking payment from the children may go after the family home (even if the parents are still living there). This is not the case if the parents set-up a living trust for the future benefit of their children.
For example, John is a widow, and he decided to deed his home to his son, Tyler. John did this because he wanted to avoid the probate court system and taxes. Several months later, Tyler is in an auto accident. Tyler ended up with a court judgement rendered against him because of personal injuries suffered by the accident victim. Tyler had no money other than the family home (which his father put in his name). As a result, the accident victim’s attorney went after the family home; a lien was placed against it.
Aside from adding children on title to real property, some people also add their children’s names to bank accounts and other financial accounts to allow them access if they die or face a sudden health crisis. The problem is that if the child or children dies first (before the parents) then the parents will owe taxes.
For example, Harry Husband and Wanda Wife, both in their late 80’s, decide to put their son, Michael, on title to their bank accounts. Sadly, Michael died four months later. Harry and Wanda, still grieving the loss of their son, received a tax bill two months later from the state for a couple thousand dollars. A third of the money was considered to be Michael’s and since Harry and Wanda had “inherited” it, the owed a tax. This is the result even though Michael had none of his own money in the accounts and had never even visited the banks where they were held.
Beyond the above scenarios, the potential for liability extends to other types of claims, such as IRS liens and other monies due to creditors.
The moral of the story? Putting children on title to real or personal property is not a smart decision. A living trust in California will allow the parent to transfer the family home (with Prop 58 exemptions) to the child while retaining complete control during their lifetime. This avoids the potential for outside civil liability and loss of legacy for future generations.
If John had put his home in trust for the benefit of Tyler upon his death, the creditors would have been precluded to go after the home as it is not Tyler’s asset (only an expected one upon John’s death). The house would have been left out of the court judgement. As such, the equity in the family home would have been saved for Tyler and future generations.
Do you have a sticky California living trust question?