Types of Wills  /  Life Estates  /  Forms of Owning Real Property

      FORMS OF HOLDING TITLE TO ASSETS

TITLE REGISTRATION

How people take title to assets determines what happens to the assets at death. In California it is possible to take title to assets in a number of different ways.

Real estate almost always forms a major portion of anyone's total assets. As such, it present a greater challenge in your strategies to protect it against judgment creditors. From the judgment creditor's point of view, real estate is the easiest asset to attach, since it cannot be owned, hidden or transferred in an ordinary course of business and requires some sort of recording.

Generally, when you buy, transfer, encumber or hypothecate a real property, the transaction is recorded at the county recorder's office, or some location where land records are kept, and therefore becomes public record.  As such, anyone can access them, including title insurance companies, direct marketers, real estate agents, John Q. Public, and would-be judgment creditors. The challenge presented to an estate owner is two-fold: first, keep the ownership of the property from becoming public knowledge, if possible; and second, hold the title so as to obtain the maximum protection from creditors, taxes, probate costs or divorce settlements.

Every mode of real property ownership has it's own advantages and disadvantages. Even for one person, a combination of ownership methods such as owning a family home in joint tenancy and some other realty in a family limited partnership or corporation form, is quite common.

Title may be taken as:

Ownership in Severalty ~ An Individual (in the individual's name)

This is the commonest way to own real property. It is possible to take title to an asset in the individual's name alone. Title may be taken in the name of "John Doe, an unmarried man." The decedent's will or California laws regarding intestate succession control who inherits an asset titled in a person's name alone at death.

However, if title is taken in an individual name alone and the person is married, then further questions must be answered as to the nature of the asset. Assets owned by a husband and wife may be the couple's community property, may be their quasi-community property, or may be the separate property of either spouse.

If the asset in question has been acquired during marriage while the couple lived in California or another community property state, then that asset is community property. The surviving spouse is then entitled to one-half of that asset, and the other half will pass by the decedent's will or intestate succession. If the asset was acquired during marriage while living in a non-community property state and it would have been community property if acquired in California, then the above rule will also apply.

If the asset was acquired by a married person either by gift or inheritance during marriage or was owned by the party when he or she married, then the asset is that person's separate property and the person may dispose of all of it at death, without leaving any portion to the surviving spouse.   Back

Tenancy in Common

This form of ownership is most prevalent among non-related co-owners. In a tenancy in common, each owner owns a certain interest in the real property which could be an uneven amount. For example, two co-owners each own 40% of the asset and the third co-owner owns the remaining 20% interest. Each tenant can convey his or her interest in the property without knowledge or consent of the other co-owners, and surviving owner's interests remain undisturbed. A tenant can also devise or bequest his or her interest in a testamentary disposition independent of the other tenant's interests.

It is possible for second marriage husbands and wives to own a property as tenancy in common and dispose of the property upon death to respective heirs from their previous marriages. This is not possible if the property was held in joint tenancy with right of survivorship.  Back

Joint Tenancy with Right of Survivorship

If title is taken in the name of two or more people as "joint tenants with right of survivorship," the asset or assets automatically pass to the surviving joint tenant or joint tenants at death. The joint tenancy supersedes the individual's will. Joint tenancy means "right of survivorship," even though that is not specifically stated.

To have assets in joint tenancy, it is necessary for the words "joint tenants," "joint tenancy," or some abbreviation to appear on the deed, stock certificate, or other document whereby the individuals took title to the assets. "Or" only means joint tenancy with regard to vehicles registered under the California Vehicle Code, United States savings bonds, and United States Treasury obligations.

To terminate joint tenancy and to transfer the asset to the survivor or survivors at death a certified copy of the death certificate is required along with an "affidavit of death of the joint tenant." This death certificate is furnished to the bank, stock transfer agent, or recorded with a real estate form with the county recorder. No probate or legal proceeding is required.  Back

Tenants by the Entireties

"Tenants by the entireties" is an old term used for holding title as joint tenants only between husband and wife. Although many states use this form of title, California does not recognize this form of title holding.  Back

Community property for husband and wife

In California the term "community property" has two separate meanings. First, it refers to the nature of assets acquired by husband and wife during marriage. All of the couple's assets may be community property if they acquired everything since they married.

Second, in California it is possible for husband and wife to take title to assets in their names as "community property." This means that the spouse who dies can will away his or her one-half of the asset, and the other one-half is retained by the surviving spouse.  Back

Community property with right of survivorship

Effective July 1, 2001, California Civil Code Section 682.1 allows a husband and wife may also take title as "community property with right of survivorship." This allows a couple to hold assets as community property, with income tax advantges, but have assets pass at death to the surviving spouse without any court proceedings or complications.

To hold title in this manner, both husband and wife must sign or initial the document making the transfer to indicate their acceptance of this title holding.  Back

Trustee registration

For various bank, savings and loan associations and credit union accounts, it is possible to take title in someone's name as "trustee" for another party. Title may be in the name of "John Doe, Trustee for Martha Doe." Here there is no trust or document; the registration is merely a way of holding title to an account.

At death, the named beneficiary inherits the account without going through probate or legal proceedings. Normally, only a certified copy of the death certificate is necessary to change title at death. In the above example, Martha Doe has no access to the account of John Doe until his death. At his death she inherits this account and this right supersedes any will or state law on inheritance.

This type of registration cannot be used for securities or real property.  Back

Partnership (General or Limited)

Many income producing properties are owned in partnership. Partnership agreements define the rights and obligations of each partner and spell out the distribution of the assets upon dissolution of the partnership. There are two types of partnership:

First, in a "general partnership", two or more general partners (each having unlimited liability for the debts of the partnership) have the power to manage and control all the assets of the partnership. Any one of the general partners can obligate the entire partnership including the personal, non-partnership assets of the other general partner(s) without their consent. This is a major risk from an asset protection standpoint.

Secondly, the "limited partnership" limits the liability of each limited partner to the capital contribution of that limited partner into the partnership. Limited partners cannot participate in the management of the partnership. This prerogative is reserved to the general partner(s) along with the unlimited liability as a general partner. Besides limiting the risk exposure of each limited partner, title to the real property is held in the name of the partnership and not the partner's names. Partnership income is distributed pro rata and reported on the individual's tax returns.

An offshoot of this is the structuring of a "family limited partnership" (FLP). It has all the unique advantages of offering asset protection for the head of the family while allowing the owners to retain management and control of the assets.

Recent hybrids include the limited liability partnership, limited liability limited partnership, and limited liability company, to name a few.  Back

Corporations

Corporate ownership of real property is also quite common, especially where the corporation owns other businesses. Corporations offer the advantage of anonymity, especially when the corporation is formed under the laws of Nevada or Delaware. Of course, the biggest advantage of corporate ownership is the limited liability it confers upon it's owners. The disadvantage of a corporation is the double-taxation feature; the corporation first pays tax on any generated income, and then the stockholders are taxed on the dividends distributed to them.

The Tax Reform Act of 1986 left a big loophole for certain closely held corporations from its onerous passive activity rules. The $25,000 limitation on real estate losses is generally not applicable to corporations. One tax strategy may be to put loss generating real property into a corporation with other businesses that generate income; that way the real property losses can be offset by the other income generated by the corporation.  Back

P.O.D. (Payable on death)

It is possible to take title to some assets in the individual's name P.O.D. with a beneficiary listed. This type of registration applies to bank, savings and loan, and credit union accounts, United States savings bonds and vehicles registered under the California Vehicle Code.

Title may be taken in the name of "John Doe, P.O.D. Martha Doe. " As with trustee registration, this means that at the death of the owner, the asset passes to the named beneficiary. It again supersedes the decedent's will and avoids probate.

This type of registration cannot be used for securities or real property.  Back

T.O.D. (Transfer on death)

It is possible to register securities in an individual's name T.O.D. with a beneficiary designation. This is only used for securities such as stocks, bond, and mutual funds, and only if the securities firm will allow it. The named beneficiary or beneficiaries receive the asset at death since this form of registration supersedes the decedent's will and avoids probate.  Back

ESTATE TAXES

The federal government has a federal estate tax based on the assets owned by the decedent at death. While it is possible to avoid probate by holding title to assets in joint tenancy or in a trustee or P.O.D. or T.O.D. registration, these assets are still taxed at death. If Mary Doe, who owns $900,000 of assets, places her two children on all of the assets as joint tenants, she avoids the probate proceedings at death. However, the full $900,000 is subject to the federal estate tax unless it can be shown that one of the other parties actually put money into the asset. Joint tenancy avoids probate but does not avoid taxation at death.

GIFT TAX

Merely changing title to assets such as putting property into joint tenancy is sometimes considered a gift and is subject to gift tax.

It is possible to put bank, savings and loan, and credit union accounts into joint tenancy, as well as brokerage accounts, vehicles and United States savings bonds without incurring any gift tax. However, it is a gift to place real property or securities such as stocks, bonds and mutual funds into joint tenancy.

Federal law exempts a spouse from any gift tax if the spouse is a United States citizen. For others, there is a gift tax. In joint tenancy, each joint tenant has an equal interest. Two joint tenants own one-half each; three joint tenants each own one-third, etc.

If Mary Doe owns a $600,000 home in her name alone and puts it into joint tenancy with her two children, they then each own one-third, and she is making a gift to her two children of $400,000 (One-third of $600,000, or $200,000 per child). Gift tax laws allow total cumulative gifts of up to $1,000,000 before a tax is due. However, once property is put into joint tenancy and a gift is made, the party owns an undivided interest. In this example, if one of the children is sued or the tax authorities go after the child, it is possible that the home may be sold and the creditors can reach the child's one-third interest, or $200,000.

Unfortunately, even though there may be a gift, the gift is nullified at death and the entire asset is still taxed for estate tax purposes when Mary Doe dies.

If assets are placed in a tenants in common registration, then the person is making a gift on the proportionate share. If Mary Doe changes title to her home so that she and her daughter now own the property as tenants in common, they each own an undivided one-half interest and Martha Doe has made a gift to her daughter of one-half of the value of the property. At death, this one-half is not taxed in Mary Doe's estate.

If a married person has property in his or her name alone which is that person's separate property and changes title to the asset to "community property" with the spouse, then the person is making a gift of one-half of the value to the spouse. Again, the spouse is exempt from gift tax if a United States citizen.

CAPITAL GAINS TAX

Comparing Chart A (Joint Tenants) to Chart B (Community Property) shows the difference.

Chart A Ė Home Held as Joint Tenants When Jack Died

Item

Amount

Comments

Sale proceeds (net)

 

$650,000

What Jill receives at sale

Subtract:
Jillís 50% of cost basis
Jackís 50% of cost basis
Combined Basis


$25,000
$200,000




Ė $225,000

Jillís share of original cost plus improvements
The "stepped-up basis" for Jackís share

Jillís Capital Gain

 

$425,000

Equals proceeds minus combined basis

Subtract:
Residence Exclusion

 


Ė $250,000

Up to $250,000 for a single person, $500,000 for a couple; if residence for two of last five years

Jillís Taxable Capital Gain

 

 


$175,000

At a combined Federal and California rate of 25%, a $43,750 capital gains tax would be due.


Chart B Ė
Home Held as Community Property When Jack Died

Item

Amount

Comments

Sale proceeds (net)

 

$650,000

What Jill receives at sale

Subtract:
Jillís 50% of cost basis
Jackís 50% of cost basis
Combined Basis


$200,000
$200,000


 

Ė $400,000


The "stepped-up basis" for Jillís share
The "stepped-up basis" for Jackís share

Jillís Capital Gain

$250,000

Equals proceeds minus combined basis

Subtract:
Residence Exclusion

 


Ė $250,000

Up to $250,000 for a single person, $500,000 for a couple; if residence for two of last five years

Jillís Taxable Capital Gain

 

$0

No capital gains tax is due.

 

DETERMINING HOW TITLE IS HELD

To determine how title is held, it is necessary to look at the various documents for institutions showing title.

Real property

Title to real property is shown on the deed when the person or persons acquired title. The original deed needs to be examined or the deed acquiring title if there was a later deed. The county recorder or a local title company may be able to help.

Deeds of trust

In California if someone loans money in connection with real property, he or she gets a note from the borrowers and also a deed of trust, which places a lien on the property in the lender's favor. Title to the deed of trust (where one is the payee or lender, not the borrower) is shown on the deed of trust.

Brokerage account

Title to a brokerage account is shown on the account itself. Title may be abbreviated such as "Jt. Ten." or "JTWROS." Or, it may be another type of registration. The brokerage firm should be consulted if there are any questions.

Notes

A note covers money lent and lists the name or names of the borrowers. If two or more people are listed as the borrowers, the note should indicate how they hold title to this note.

Stocks and Bonds

Stocks and bonds which are not held by a brokerage firm are usually evidenced by certificates. If the certificates are in the name of two or more people, they should state how title is held. This may be abbreviated, such as "JTWROS," which stands for "joint tenants with right of survivorship." The certificates may instead read "TEN COM," which means "tenants in common," or "COM PROP," which stands for "community property."

Mutual funds

When someone owns a mutual fund, he or she normally does not get certificates for the shares held in the fund but a statement which may come monthly, quarterly, semi-annually, or annually. The statement shows how title is held if it is in the name of two or more people.

It is possible to obtain certificates for shares in a mutual fund and if a certificate or certificates are issued, the rule for stock certificates will apply.

Stock reinvestment account

A stock reinvestment fund is a fund which reinvests dividends into more shares in the company. The individual or people may have certificates for the shares purchased and also own shares held in the dividend reinvestment account. The shares held in this account are not issued and are treated similarly to mutual fund shares. The quarterly report from the agent shows how title to the reinvestment account is held.

United States Treasury obligations

United States Treasury obligations are United States Treasury bills, notes, and bonds. They can be purchased and held by a bank or brokerage firm, or they may be purchased through what is called a "Treasury direct account." This is an account whereby the investor or investors receive a periodic statement on the assets owned. No certificates are issued.

The Treasury direct statement shows how title is held. If the term "or" is used, it indicates joint tenancy.

United States savings bonds

United States savings bonds refer to the E, H, EE and HH bonds. These can be in individual name, in the name of two people (but not more than two people) as "or," which is treated as joint tenancy, or in a "P.O.D." registration, whereby a beneficiary is listed.

Limited partnerships

An interest in a limited partnership is shown on the partnership books. The general partner should be able to determine how title is held. Sometimes, but not always, the title registration is shown on the annual income tax form issued by the partnership, which is a "K-1" Internal Revenue Service form.

Vehicles

The term "vehicles" refers not only to automobiles, but to other items which can be registered under the California Vehicle Code. This includes RVs, motorcycles, trailers, trucks, boats, and other types.

The certificate of ownership shows how title is held. If the term "or" appears, then the vehicle is in joint tenancy. If the term "and" is used or there is a slash "/" it is treated as tenants in common, and each owner owns an equal share. If it is listed in a P.O.D. registration, then there is a named beneficiary who inherits at death.

Other assets

Other assets may include a copyright for a publication or music composition, an animal such as a thoroughbred horse or dog, an airplane, a large boat registered with the United States Coast Guard, or some other item. In each case the certificate or document of registration must be examined to determine how title is taken.

Untitled assets

Assets which do not have a certificate or document of registration are considered owned by the person who physically has the item.

Safe deposit boxes

Safe deposit boxes can be set up so that there are several signers. Even though more than one person may have access to the box, the contents are not considered to be held in "joint tenancy" and do not pass to the other co-signers. If bearer bonds or coins are in a safe deposit box they do not automatically go to the other co-signers on the box.

TITLE NOT STATED

Sometimes the names of two or more people are on a certificate or document but there is no indication as to how title is held. Title may be in the name of "John Doe and Mary Doe" or "John Doe and Mary Doe, Husband and Wife."

If the document shows the parties to be husband and wife, then title is treated as if it was registered in community property.

If title is in the name of two people and they are not shown on the document to be husband and wife, title is treated as tenants in common, with each party having an equal interest.

Title is never presumed to be joint tenancy.

INCOME TAX COST BASIS AT DEATH

"Cost basis" refers to a person's income tax basis in an asset. If one buys stock for $5,000, and later sells it for $10,000, the cost basis for determining the gain or loss is $5,000, and if more is received for it at the time of sale there is a capital gain.

Assets get a new valuation or cost basis at death. The new value is the value of each asset on the federal estate tax return filed for the decedent. If no federal estate tax is filed, then the new cost basis is the fair market value at the date of death. Mary Doe paid $5,000 for stock and kept it until she died. At her death the stock was worth $10,000. Her children get a new cost basis of $10,000 and if they sell the stock they compute their gain or loss on the value at death of death, $10,000, not the original cost basis. The difference is forgiven. This is why many older people keep assets and do not sell them because they escape capital gains tax at death.

For husband and wife, the rules are a little more confusing. If assets are held by husband and wife as joint tenants, then only one-half of each asset gets a new value at the death of the first spouse. If the home was purchased for $60,000 twenty years ago but is worth $360,000 at death, then the cost basis is one-half of fair market value for the deceased person's share (1/2 of $360,000, or $180,000). The surviving spouse, however, keeps his or her original cost basis (1/2 of $60,000, or $30,000). The adjusted cost basis is therefore $210,000 ($180,000 plus $30,000).

If the couple held title to the home in their names as community property, or held the home in a revocable living trust as community property, then both halves of the home get a new value as of the date of death of the first spouse. Here, the home is valued at $360,000, and if it is community property the new cost basis is $360,000.

It is better to hold assets which have appreciated in the couple's names as community property, as community property with right of survivorship, or in a revocable living trust as community property. At the death of the first spouse then all of the community property assets get a new income tax valuation and all capital gains until that point are forgiven.

The above is due to change for persons dying on or after January 1, 2010.

REASSESSMENT OF CALIFORNIA REAL PROPERTY

California voters years ago passed Proposition 13, which provided that real property was not reassessed in value unless there was a change in ownership. Death is considered a change of ownership and real property is reassessed for real estate tax purposes at the fair market value as of the date of death.

Mary Doe purchased a home many years ago for $60,000. Her real estate tax bill is $720 per year. She leaves the home to nieces and nephews when she dies. The property is reassessed as of the date of her death for its current fair market value of $360,000. The annual real estate tax bill increases to approximately $4,000 per year.

There are a number of exceptions to reassessment of real property. Any property passing to a spouse is exempt. One can also leave a home of any value and additional real estate with an assessed value of up to $1,000,000 to children without triggering any reassessment. If a child and child's spouse die ahead of a parent and the property passes to the deceased child's children, then these grandchildren are exempt just as the deceased child would have been.

Other than the above, real estate at death is subject to reassessment and the county reassesses the property and mails a supplemental real estate tax bill for the prorated portion of the tax year.

SUMMARY

It is very important to review how title is held to various assets. How title is taken determines what happens to the asset at death, in terms of who inherits that asset.

Individuals and couples should review how they hold title and should make a list of the various assets and title holding. If title is not held in the manner desired, it should be changed before death.

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C. Francis Baldwin
chasbaldwin@surewest.net
Updated Wednesday, May 26, 2004