By Alex Bogdan, Associate Attorney, Law Offices of Mark E. Lewis & Associates

“Do I really need an estate plan? I only have a house and a few accounts. Why do I need a lawyer? Can’t I just list beneficiaries and create a deed putting my son or daughter on title? Won’t that avoid probate?”

As an estate planning attorney, these are questions I hear frequently. If your estate is simple and you don’t consider yourself wealthy or have a variety of assets, you may think estate planning is unnecessary and expensive. Why not just list your children as beneficiaries on your accounts and transfer title to your home yourself? The answer is simple. For many Californians, the single largest asset they own is their home. As an attorney who deals with estates and probates, I know that any mistake handling that asset can become costly.

What You Don’t Know Can Hurt You

Most of my clients are aware of California’s probate process and the time and expense involved. One consideration they may not think about when it comes to real estate is their annual property taxes. Any time there is a change in ownership, the County Assessor’s Office can reassess your property and increase taxes. Placing someone else on title with you can be considered a change in ownership and consequently trigger a reassessment. Suddenly, what should have saved you time and money in court down the road could instead cost you thousands of dollars per year immediately.

I often meet with clients who had attempted to transfer title or a property themselves, but the deeds were completed incorrectly or were not appropriate to their situation. Deeds can be created by realtors or an escrow company, which does provide some oversight on proper recordation of a transfer, but even then, the agent or escrow officer cannot provide you with critical legal advice to avoid a misstep. For example: clients may receive guidance on how to fill out a form, but no guidance on why they are using that form or what consequences it might have. Consulting with an experienced attorney is both wise and necessary for avoiding property transfer pitfalls.

Let’s take the common scenario of wanting to leave your home to your child in your estate. It is true that putting that child on title during your lifetime can avoid probate (if done correctly). However, this also creates tax issues for your child when the property is sold. If the property appreciated in value, anything over your “basis” (what you paid for the property) is taxable under capital gains rules when sold. When someone inherits a property after the owner dies, the basis is increased, or “stepped up” to the fair market value of that property at death. However, this increase in basis does not occur when you give someone something while you are alive. If you give your child an interest in the property now, when they go to sell the property in the future, they will have a very large tax bill.

The Newest Rule

Recently enacted Proposition 19 changed the parent-to-child exemption rules to require that the inheriting child must live in the home at the time of transfer. Because of this change, we are seeing reassessments happening at a staggering rate, and the tax consequences often force a sale of the family home. Additionally, if your home is valued at more than $1 million, anything over that amount could be added to your tax basis. This is a stark change from the previous simple, more lenient Proposition 58 parent-to-child rules.

Be sure to speak with an attorney and understand the rules prior to making any potentially permanent transfers. With continually increasing property values, it remains just as important to protect your home from the probate process as it does from property taxes. A carefully constructed estate plan will help you avoid these pitfalls. Your home is your most important asset. It’s important to make sure you have a plan in place to protect it. Our office is here to help.