Your home or investment property is likely the most valuable asset you own. Yet most people don’t think about how to hold title until the title company poses the question when the property is bought, refinanced, or inherited. However, this deserves careful consideration, because how you hold title to property has estate planning implications. Deciding on ownership is generally based on few factors, including preference as to sole ownership or co-ownership, desired disposition of property at death, and estate and inheritance tax effects.  It’s important to consider these issues as ignoring them can result in unanticipated taxes, liability, fees, and headaches. Here are the most common ways to hold title:

Sole Ownership

This is simple for a single person, but a married person can also take sole ownership in a property.  Since California is a community property state, property purchased during marriage is presumed to be a joint asset of the married couple. To identify that the property is sole ownership of one spouse, title should be identified as sole and separate property of the married person. And to make sure it’s absolutely clear, the non-owning spouse should sign a quitclaim deed giving up any ownership interest in the property.

Tenants in Common

This is a common form of ownership, particularly for non-married owners.  Each tenant in common owns a specified interest in the property, which do not need to be equal.  A major advantage of this is that each tenant in common can sell or pass his interest by his will or trust to whomever he or she wishes.  However, there are disadvantages to this type of ownership.  For example, the remaining tenant in common could wind up co-owning property with a stranger.  Or if one co-owner dies without an estate plan, the deceased co-owner’s share will go through a probate process, which could be expensive and costly.

Joint Tenancy

Under this form of ownership, all co-owners must take title at the same time.  They all own equal shares, and the surviving co-owner(s) winds up owning the entire property. For example, if two siblings inherit property from their parents and take title as joint tenants, the surviving sibling will inherit the property. The advantage of joint tenancy ownership is it avoids probate costs and delays upon the death of a joint tenant. A major disadvantage, however, is that you cannot give the property to anyone else but your co-owner.

Community Property

In several states, California being one of them, when spouses purchase property, each spouse then owns half the property, which can be passed by the spouse’s will / trust either to the surviving spouse or someone else.  This has a special advantage in that community property assets willed to a surviving spouse receive a double step-up in basis at market value on the date of death, which can save a lot in taxes when the surviving spouse sells the property.

Living Trust

The best way to hold title to homes and other real property is in a revocable living trust. There are many advantages, such as avoidance of probate costs and delays.  Because the trust is revocable, assets can be bought, sold and financed normally.  If the trust creator becomes incapacitated, the named successor trustee takes over management of the trust assets. When the trust creator dies, the assets are distributed according to the trust’s terms.  Living trusts also provide privacy around your estate, as trusts do not become part of public record, and because you are not on court’s time, you can ensure that your assets pass as you intended expeditiously and without fuss.

How you hold title to real estate should be given careful consideration. Check your deed and make necessary changes now while you can. If you have questions about how you hold title and what impact it will have later one, please get in touch – we’re happy to help.