How Should You Hold Title To Your Home?
How should I hold Title to my Home?
TITLE TO PROPERTY: The most common ways to hold title to property are as follows:
A. Sole and Separate Property: Used by a single person or by a married person who identifies the property as his or her own separate property with their spouse having no community property interest therein. On death, in order to pass title to heirs, the property must pass through expensive and time consuming probate court proceedings as discussed below.
B. Community Property: Used by married persons with each spouse having an equal undivided interest in the property. The death of one spouse may cause his or her interest to go through expensive probate proceedings. There is a step up in basis on the entire value of the property to the fair market value on the date of the death of the first spouse. On the death of both spouses the property must still pass through expensive and time consuming probate court proceedings to transfer to heirs.
C. Community Property with Right of Survivorship: A new way to hold title in California, this is used by married couples and transfers, without probate, a deceased spouses interest in real property. There is a step up in basis on the entire value of the property to the fair market value on the date of the death of the first spouse. On the death of the second spouse the property must pass through probate court proceedings to pass to heirs.
D. Joint Tenancy: Used by two or more owners who each have an undivided equal interest in the property. Join Tenancy has a right of survivorship which allows the transfer of title to property held by a deceased joint tenant to the surviving joint tenant(s) without probate. There is a step up in basis only with respect to the deceased owners ownership portion to the date of death fair market value of the property. Thus where married couples own property as joint tenants, they only receive a one half step up in basis on the property where they would have received a full step up in basis if they held the property as community property. The death of all joint tenancy owners will cause a probate. Also often this is used to try to transfer title to a spouse or children at death. However be advised that if a parent adds a child as a joint tenant during their life, the child will get the property without probate at the death of the parent but the child will obtain the cost basis the parent had in the property. As a result, when the property is sold, there could be significant and unnecessary capital gains taxes to be paid by the child.
E. Tenancy in Common: Used by two or more owners who may have different ownership interests in property. A death will cause a probate of the deceased owners interest.
F. Title Holding Trust: Used by single or married persons who create a living trust and hold title in their names as Trustee(s) of their trust.
BY FAR THE MOST BENEFICIAL WAY TO HOLD PROPERTY IS IN A LIVING TRUST. HERE’S WHY:
YOU PICK WHO GETS YOUR HOME UPON DEATH: Trusts act similar to a will in that it names who gets your home and other assets when you are gone and when. Holding title to your home and your other assets in your trust subjects them to your plan of disposition at death. Failure to state a plan could pass your home and other assets to people who you do not want to inherit them. A simple will alone could do the same but your home will still likely have to go through the probate court process upon death to transfer title to your heirs.
HOLDING TITLE OTHER THAN IN A TRUST MAY RESULT IN PROBATE: In all cases of a death of someone holding title as their sole and separate property and in most other forms of holding title other than in a trust, the death of both spouses will cause the home and other assets to go through expensive probate proceedings.
AVOIDS HIGH COST AND PITFALLS OF PROBATE: Assets held in a trust avoid probate court proceeding at death. Upon death, the Trust will allow you to pass on your home or proceeds after sale as well as you other assets to your named beneficiaries without going through the probate process. Tens of thousands of dollars are lost to legal and executor fees by failing to hold title in the name of a trust. The amount of probate fees varies according to the gross value (including the fair market value of real estate) of the estate. For example, an estate worth $500,000 would have minimum attorney and executor fees of approximately $26,000. With an estate valued at $1,000,000 the fees would be approximately $62,000. As a result, any homeowner in Southern California will certainly fall within or exceed these amounts, which quickly illustrates why it is important to plan now to avoid probate.
EASE IN MANAGEMENT IF INCAPACITATED: Your home and other assets will be managed by your spouse serving as co-trustee (if married) or a successor trustee that you pick, if you are unable to handle your affairs for any reason such as health, incapacity or death.
TAX BENEFITS: Inheritance taxes on the assets (including real property) passed to beneficiaries can be reduced or eliminated with a proper living trust. Tens and even hundreds of thousands of dollars can be avoided with larger estates.
STEP UP IN BASIS: Married couples holding title in their trust as community property enjoy a step up in basis from the purchase price to its then fair market value of the entire home at the death of one spouse. Further it is generally better to inherit property than to receive it as a gift during life. Inherited property gets a step up in basis. Property received as a gift during life passes the same basis on to the recipient of the gift. By passing property though a trust versus a gift during life, the recipient will enjoy a step up in basis, will reduce or avoid capital gains taxes on the inherited property if it is later sold, and will receive the property without having to go through probate.
SOUNDS GREAT WHAT DO I DO NOW: The key is to get started! To do so the first step is to make an appointment with an attorney. Estate plans are too important to be left to paralegals or computer programs. I have found that the hardest part of estate planning is making the appointment. Don’t wait until you have all your paperwork and files organized as you may not need all you think you need to get started. After an hour and a half meeting with an attorney you will understand the process, make selections of who will be involved in your plan, decide who will receive your estate and when, and address important health care questions. Most important, you be on your way to having peace of mind knowing that you have taken care of this important planning task for you and your family. Services for California residents only.