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 question comes up quite frequently in estate planning. Before making a decision on the optimal way to take title, let’s explore the qualities and ramification of each choice.
Joint tenancy, whose full nameis joint tenancy with right of survivorship. This type of title may be taken anytime there will be more than one owner of the property. There is no requisite relationship between the parties. They do not need to be related or married. Owning property as joint tenants means that each person owns an undivided and equal interest in the entire property (if there are two owners, each owns 50%, if there are 4 owners, each owns 25%, etc.). When one owner dies the remaining owners will automatically receive the deceased owner’s share – hence the “right of survivorship”. 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. When there is only one owner left, unless some additional estate planning is done, that property will be probated.
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. The basis of the property will be adjusted to fair market value for the half owned by the deceased spouse and this will reduce at least a portion of the capital gains taxes upon the sale of the property by the surviving 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. Like Joint Tenants, there does not need to be any family relationship between the parties. Unlike Joint Tenants, each person can own a specified percentage of the property and it does not need to be equal ownership (ex. I won 30% and you own 70%). Upon the death of an owner, that owner’s share is controlled by his or her will or trust, or in the absence of a will, intestate succession (the CA probate code tells you where it goes). There is no “right of survivorship.”
Community property with Right of Survivorship title may only be used by married couples in community property states (like California). Similar to joint tenancy, each person owns an equal and undivided interest in the entire property and when one spouse dies the survivor automatically receives the entire interest, thereby avoiding the need for probate. (Note that it must be designated as community property with right of survivorship in order to avoid probate. A community property designation will still require court action to transfer the property to the surviving spouse.) As with joint tenancy property, property titled as community property with right of survivorship will not be controlled by a person’s will or trust. There is a tremendous benefit from a capital gains tax standpoint in that the entire property (not just the half belonging to the deceased spouse) will receive a step up in basis on the death of the first spouse.
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. If you have a trust, this is optimal 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 and preserves the capital gains step up for the entire property on the first death. 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.
Conclusion – if a married couple have a revocable living trust, they should take title in the name of that trust. If a married couple does not have a trust and are unwilling to create one, then the next best option is “Community Property with Right of Survivorship”. Finally, if the married couple do not live in a community property state, or own property in a state that does not follow community property laws, then the last resort would be to take title as “Joint Tenants”. However, each circumstance is different and in order to fully understand and plan for all the implications associated with your situation – property taxes, capital gains tax, probate avoidance, estate taxes – seek the advice and counsel of a qualified California estate planning attorney.