Deciding How to Hold Title Crucial in Making Purchase
The way in which property owners hold title to their property can have far-reaching implications. Title affects income taxes, estate planning, division of property in case of a divorce and a whole range of family relationships.
“Most people don’t consider how to hold title until the last minute before closing of escrow,” said Lawrence Green, executive vice president and an attorney at the California Land Title Assn. in Sacramento. “It’s the sort of thing that people should discuss before they buy property,” he said, and “I would recommend that people consult an attorney.”
Most married couples opt for holding title to their home either as community property or as joint tenants.
In California, real property for a married couple is generally presumed to be community property, which means that the property is divided by both spouses. Joint tenants may or may not be married and their equal interests in a property are automatically conveyed to the survivor(s) when one or more of the joint tenants dies.
Some buyers may opt to hold their property as tenants in common. Each co-tenant may sell, lease or will their share of the property, creating all sorts of potential problems if there isn’t a side agreement that sets out the ground rules for the relationship between the co-tenants. Unmarried people who buy property together as an investment will probably opt to be tenants in common. Domestic partners who want the surviving partner to get the house without a will usually opt for joint tenancy.
Individuals currently have the ability to give away during their life or upon death $600,000 of their estate without triggering estate or gift taxes for the recipient. There’s talk in Washington, however, of reducing that exemption to $200,000 in order to generate more tax revenues for the Treasury. One way to avoid this possibility is to place your home in a GRIT--grantor retained income trust, advised Bruce Givner, a partner at Encino-based law firm Grayson, Givner, Booke, Silver & Wolfe.
Finally, there are all sorts of trusts that homeowners can create to hold title to property. These trusts may be created for tax, estate or charitable purposes and the terms of the trust are almost anything that the party establishing the trust--also known as the trustor--chooses. A trust can be revocable or irrevocable.
Green said it’s important to remember that what’s written on the title documents doesn’t guarantee what happens with the property in the case of death or divorce. A trust may be contested in court, or a spouse can argue that what started out as separate property on a deed has been “transmuted” or gifted to the community and is no longer the sole property of party on the deed.
Each manner of holding title has its advantages and disadvantages, said Alan Kheel, partner at law firm Reznik & Reznik in Sherman Oaks.
“Most married couples listen to their real estate brokers, who tell them to hold title as joint tenants,” Kheel said. “But that’s probably not the best way.”
Joint tenancy used to be preferred because it was the best way to avoid probate. Community property now also allows a surviving spouse to avoid probate, and that surviving spouse also benefits from the fact that the IRS steps up the full cost basis of the home at the death of the first spouse, thus allowing the second spouse to avoid a capital gain.
Joint tenancy is also “a very fragile thing,” Kheel observed. Either party to a joint tenancy can sever the joint tenancy and then proceed to will away or encumber their portion of the property. All this can happen without the other joint tenant knowing about it. The downside to community property is that it may not be appropriate for couples who want to have separate and distinct property interests.
Some families choose to avoid probate for their children by placing the names of their children on the deed to their parents’ home.
“I think it’s a bad move unless you can totally trust your children,” Kheel warned. Besides, the child can’t be obliged to return his or her share of the property when the parents ask for it back.
Trusts are an increasingly popular way to hold title to real property, said Robert Weissman, partner at law firm Weissman & Weissman in Encino. There are so-called Q-TIP trusts--qualified terminable interest property trusts--which upon the death of one spouse provides an estate to the surviving spouse. When the second spouse dies, the property goes to someone designated in the trust. This type of trust is useful for property owners who are on their second or third marriage and want their children to inherit after both the husband and wife pass away.
Family trusts--better known as living trusts--are basically trusts that transfer property before death to avoid taxes. The trustor, or creator of the trust, retains the right to revoke the trust.
Charitable remainder trusts are another estate planning tool used frequently by high net worth individuals.
“Most people choose the way their title reads without a lot of thought,” said Robert L. Reyburn, senior underwriter for the Southern California division of Commonwealth Land Title Co. in downtown Los Angeles. “I’m not sure real estate brokers or escrow officers are qualified to advise people how to hold title.”
Reyburn advises consulting attorneys with a knowledge of estate planning, taxation, accounting, real estate and family law.
Basically, a GRIT allows property owners to place their home in a trust that transfers the property irrevocably for the benefit of beneficiaries such as children. This creates an immediate taxable event, but the tax is not based on the value of the house, but instead on the value of the beneficiary’s right to have the house at the end of the GRIT. Such a GRIT may be created for 10 or 15 years, after which the former owner has to pay rent to the beneficiary.
More information is available by calling the California Land Title Assn., which publishes a pamphlet called “Understanding Common Ways of Holding Title.”
The pamphlet is available by calling the association at (916) 444-2647.
