December 2015 update: The laws will probably be changing in 2016 allowing a beneficiary designation on real estate in California. However, that doesn't necessarily mean doing so is a good idea. The following blog post was written in early 2015:
Unlike many other types of assets, in California you cannot simply designate a beneficiary on your real estate. You can do so on almost every other asset (IRAs, 401ks, life insurance, even bank accounts in most cases).
Whether or not using beneficiary designations on everything is a good idea is a topic for another blog post. In fact, simply using beneficiaries is not always the smartest way to go. There are many downsides and shortcomings.
However, most states draw the line when it comes to real estate. There are a handful of states that allow people to designate beneficiaries. However, in California and most other states, transfers of real estate need to be handled more formally. So what are your options? Here are some of the main options:
First, you can add a co-owner to your property. That way, when you die, the co-owner gets the entire property. This is handled by owning assets "jointly" or what is commonly called Joint Tenancy. While on the surface that may seem like a good idea, there are some drawbacks. First, once you put someone on title with you, they are now a co-owner of that property. That means you can't simply take them off when you want. They now have equal ownership and equal say with respect to the property. Plus, selling the property becomes more difficult if your co-owner doesn't want to sell. Also, you may have unintentionally given your co-owner a future tax burden (in most cases, it is better to inherit property from a tax perspective). Finally, if your co-owner gets into any kind of trouble, your real estate is now a target.
Second, you can do nothing at all. If you do nothing at all, your real estate will likely go through the probate process. That means a judge has to supervise the transfer of the real estate. This stuff doesn't happen by magic. This process often simply called "probate" is costly and time consuming. Simply put, it's downright frustrating. Your real estate will end up with whomever you put in your will. However, if you have no will, California law (intestacy laws) will determine who gets your real estate. Aside from the costs and time consuming nature of probate, any mortgage payments, insurance, and maintenance fees are still due on any real estate going through probate. The mortgage company doesn't care if your real estate is in probate...they just want their monthly check. Where is that money going to come from?
Finally, you can set up a living trust that can own your property. The actual deed to the property will be in the name of the living trust - not your individual name. Don't worry - you still control the living trust and call all the shots. However, when you die, nothing happens because your trust continues owning the property. The trust is an entity that doesn't suffer a natural death like a human being. Therefore, even when you die, your trust lives on. Then, the terms of your trust will control the disposition of your real estate. No joint owners. No court intervention. Just a legal document that governs the distribution of all assets bearing its name.
If you want to learn more about estate planning, please give us a call at (661) 414-7100. You can also visit our videos page for lots of helpful information.