Designating pay-on-death beneficiaries for your separate property accounts

Dear Len & Rosie,

My husband and I already have a trust for all our property and bank accounts. I’ve just inherited from my father and have put this money into bank accounts under my name only and in banks where my husband and I do not have joint accounts.

Our trust provides for an equal division among my son, my daughter and my stepson. I do not want to share my inheritance with my step son. He is already inheriting money from his mother and grandparents. I have listed my husband, daughter and son as equal beneficiaries if I die on my separate property accounts. Do I need a separate trust in my name only for my bank accounts or will my beneficiaries listed at bank be given the money without probate?

Bonnie

It’s natural for you to want to provide for your own children from your separate property. Most people don’t leave much to their step-children. If you had raised your step-son from when he was a child, you probably would cut him in for a share. Keeping your separate property in a different bank than where you and your husband keep your other accounts is a very good idea. If it was all at the same bank, there’s a good chance your husband could inadvertently gain access to your separate property accounts over the Internet.

Your method of designating pay-on-death beneficiaries for your separate property accounts will likely work. However, pay-on-death designations cannot properly take into account what should happen if your son or daughter were to die before you. If that happened, your husband and surviving child would receive the accounts and any grandchildren who survive their parent’s death will get nothing. That may not be what you want. Pay-on-death beneficiary designations are also a bad idea if you have a disabled child who would lose public benefits if he or she inherited money outright from you, or if you have a spendthrift child who can’t be trusted with managing an inheritance.

As an alternative, you could either create a revocable trust solely to hold your separate property, or you could amend the joint trust you created with your husband to distribute your separate property in the manner you wish upon your death. Most well drafted trusts for married couples allow either spouse to amend the trust alone with respect to that spouse’s separate property. If there’s a lot of money involved, you should not rely on pay-on-death accounts. But if your inheritance isn’t very large, it probably won’t make much sense to spent money creating or updating a trust just to deal with a modest inheritance. Just make sure to keep up with your beneficiary designations if there’s a change in your family, such as a death, or birth, or if a child becomes disabled.

And don’t forget to keep your separate property separate. That means you should not ever put any community property money, such as savings from your paycheck, into your separate property accounts.

Len & Rosie
 

What happens to your property when you outlive your spouse?

Dear Len & Rosie,

I own a home and the deed is in my name only. My wife and I have been married for 23 years and she is a Japanese citizen. If I die, will my wife be able to get the home even though her name is not on the deed? Should I put her name on the deed?

Bob

Dear Bob,

What ever you do, don’t leave things alone, because if you die without a will or a trust, and your wife isn’t on title to the home with you, then you’re inaction is going to make things very difficult for her after your death. You need an estate plan.

If you die first, and you don’t have at least a will, then your wife will inherit all of the community property and either one-half of your separate property, if you have no children or only one child. If you have more than one child, your widow shall inherit only one-third of your separate property, together with the community property. The rest will wind up in the hands of your children or more distant relatives.

Only the portion of the home that you already bought and paid for prior to getting married is your separate property. The portion of the principal balance of your home loan that you paid off during the twenty-three years of your marriage is community property, half owned by your wife, even though her name isn’t on the deed to your home. But that’s not good enough to ensure that she’ll inherit the home on your death, because your children or other family members may argue with your wife as to how much of your home is community property. You’re asking for trouble, especially if they don’t like your wife.

At the very least you need to make a will that leaves your home to your wife upon your death. If you want her to avoid having to file a spousal property petition, you should either create a revocable trust with your wife, or you can add her name to the title of your home.

There are two ways of doing this. More commonly, married couples own their homes in joint tenancy, but it’s better that the home be titled “husband and wife as community property with right of survivorship”. That way, the home will avoid probate upon the first death, but it will also be counted as community property for tax purposes. Upon the first death, the cost basis of 100% of the home (not just the dead spouse’s half) will be stepped up to its date-of-death value. This would allow your wife to sell the home if she wants to after your death while avoiding a great deal of capital gains tax.

However, the best thing that the two of you could do is to create a revocable trust to avoid probate on the second death as well as the first, but if you choose to go with wills and holding title to the home in both of your names, do not forget that both of you need to create durable general powers of attorney and advance health care directives so that you may make important decisions for one another if either of you should become incapacitated.

Len & Rosie