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California Estate Planning Law: Schematics of Titling Real Property

California estate planning law as it relates to married couples changed in 2001

California Dreamin’ for Couples

Yes! I knew there was another reason to get married. Ya, ya, I know, the whole love thing… Just kidding, honey. All joking aside, there’s enormous financial implications to how married couples title real property in California, creating the need to strategize with relation to other estate planning docs under California estate planning law. The landscape of titling under California real estate law and how it relates California estate planning law changed in 2001 with the enactment of California Civil Code 682.1. Prior to the new law, spouses could take title in 1 of 3 ways: tenants in common, joint tenants, or community property. The most common being joint tenancy.

Now, married couples (and domestic partners since 2003) can hold real property as “community property with right of survivorship.” This new form of title (available only to couples) combines the advantageous income tax features of community property with the right of survivorship benefit of joint tenancy. Win-win, right? Maybe. Let’s take a closer look at how titling real property and creation of estate planning documents under current California estate planning law produces the best outcome.

Joint Tenancy vs. Community Property

California estate planning law has couples jumping for joyJoint Tenancy

The main advantage of joint tenancy is that it provides for the immediate and automatic transfer of title to the surviving spouse. There is no probate or other required legal proceedings. In “community property” or “tenants in common” ownerships, on the other hand, there is no automatic transfer on death. The deceased person had to follow California estate planning law and devise through a will or trust, or the property will pass by intestate succession. If there are children, the surviving spouse might not inherit her spouse’s full share.

The disadvantage of joint tenancy is that only the decedent’s portion (1/2) of the property receives a step-up in basis under IRS guidelines and/or California estate planning law. The consequence – potential for a large capital gain tax on sale.

Community Property

Unlike joint tenancy, holding property as “community property” (with or without right of survivorship) allows a step-up in basis for both halves of the property on death of the first spouse. This provides a significant capital gains advantages when the property is ultimately sold.

If a California couple titles property as “community property with right of survivorship,” they get the additional “survivorship” benefit previously available only to joint tenants.

Case Example

Husband and Wife purchase undeveloped lot as joint tenants in 1970 for $50,000. Husband dies in 2013 when property is worth $500,000.

Wife’s capital gain as surviving joint tenant is calculated as follows:

  • Wife receives a step-up in basis on Husband’s 1/2 of the property $250,000.
  • Wife retains her original purchase basis of $25,000 for the other half.
  • Wife’s adjusted basis as surviving “joint tenant” is $275,000.
  • Wife’s taxable gain if she sells the lot right after Husband’s death is $225,000.00 ($500,000 – adjusted basis of $275,000).

Wife gets the benefit of “survivorship” (i.e. avoid probate), as well as more favorable income tax treatment if the property was titled as “community property with right of survivorship.”

  • Assuming Husband left his 1/2 share of the community property to Wife, Wife’s new basis would be $500,000. Result. No taxable gain if Wife sells property right after Husband’s death.

Special Titling Concerns Under California Estate Planning Law

The new form (circa 2001) of title has advantages. It’s inexpensive, avoids probate and allows for favorable tax treatment. However, there’s a superior method to handling your property. Creating a comprehensive estate planning package under California estate planning law allows for additional flexibility while also reducing estate taxes and capital gains. Manner of holding title does not address issues such as simultaneous death, guardianship of minor children, and disposition of personal property. These issues are most efficiently addressed in estate planning docs created under California estate planning law. For those who haven’t set-up or refreshed their estate planning docs under California estate planning law, a few words of caution are in order:

  • 682.1 only applies to deeds executed on or after July 1, 2001.
  • Title needs precise language “community property with right of survivorship” to pass muster
  • If any part of the purchase price is paid with separate property of a spouse (money brought into marriage, gift, inheritance, etc), taking title as community property with right of survivorship may result in a gift to other spouse.
  • Probate is not avoided on death of surviving spouse unless a living trust is in place.

 

About Sean Hanley

Practicing law since 2007, Sean specializes in the ever-changing laws related to real estate, business and estate planning. Embracing technology with a focus on personalized service, he understands the challenges of living and thriving in Silicon Valley. Tapping into his education in economics and business administration, Sean also serves on the non-profit Willow Glen Business Association.

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