April 13, 2011
Question: When my husband and I bought our house recently our real estate agent asked us how we wanted to hold title – as joint tenants or community property. We weren’t sure and she couldn’t tell us the difference, so we took title as joint tenants because we had heard that phrase in the past. What is the difference and what is the best way for a married couple to take title?
Answer: This is a great question and one that I hear often. Before I can make a recommendation, let’s talk about what each type of title really means. Each form of title has different implications for transfer of ownership on death, property taxes and capital gains taxes.
First, joint tenancy, whose full name is joint tenancy with right of survivorship. This type of title may be taken anytime there will be more than one owner of the property. It means that each person owns an undivided interest in the entire property. When one owner dies the remaining owners will automatically receive the deceased owner’s share – that’s the right of survivorship part. Because the deceased owner’s share automatically goes to the remaining owners probate can be avoided for this property – at least until the last owner dies.
A will or trust does not control where the property goes on the death of a joint tenant. So, sometimes joint tenancy is thought of as a quick estate plan. Because we are discussing married couples only, property taxes will not be reassessed upon the death of the first spouse. The basis of the property will be adjusted to fair market value for the half owned by the deceased spouse and this will reduce any capital gains taxes upon the sale of the property by the surviving spouse. This is the most common way that I have seen married couples take title, but it may not be the best way.
Community property title may only be used by married couples in community property states (like California). Similar to joint tenancy, each person owns an undivided interest in the entire property and when one spouse dies the survivor automatically receives the entire interest, thereby avoiding the need for probate. As with joint tenancy property, property titled as community property will not be controlled by a person’s will or trust. There is a benefit from a capital gain tax standpoint in that the entire property (not just the half belonging to the deceased spouse) will receive a step up in basis on death. This allows for a double step up if the remaining spouse continues to hold the property until his or her death. The property taxes will not be reassessed on the death of the first spouse.
Tenants in common is another way that multiple people can take title to a property and is the default title implied if nothing is specified. With tenants in common each person owns a specified portion of the property and it does not need to be equal ownership. Upon the death of an owner that owner’s share is controlled by his or her will or in the absence of a will intestate succession (the CA probate code tells you where it goes).
One final way to take title is in the name of your revocable living trust. If you have created a trust for estate planning purposes you need to make sure all your assets are owned by your trust to obtain its maximum benefit. This is actually the best way for a married couple to take title. Owning property in your trust avoids probate upon the death of both the initial and surviving spouses, preserves the capital gains step up for the entire property on the first death and avoids property tax reassessment. As an added benefit, in the event that one spouse is incapacitated the other spouse, as the remaining trustee, will be able to sell and/or manage the property without worrying about obtaining a conservatorship or using a power of attorney.
My recommendation for the best way for a married couple to hold title is as follows:
1. In the name of your revocable living trust
2. Community property with right of survivorship
3. Joint tenants
As you can see the answer isn’t as simple as it first appears. To fully understand and plan for all the implications associated with your particular situtation – property tax reassessment, capital gains tax minimization, probate and estate taxes – seek the advice and counsel of a qualified California estate or life transitions attorney.