Mark W. Bidwell, Attorney at Law
4952 Warner
Suite 235
Huntington Beach, CA 92649
ph: 714-846-2888
Mark
Options for the Post Death Transfer of California Real Property (With a bias to trusts)
This post explains the options of post death transfer of real property by either planning ahead or just let the laws of California take their course. Examples of planning are; trusts, joint ownership, life time transfers and transfer on death deeds. No planning relies on the laws of intestacy and probate administration.
Intestacy law identifies who is the next of kin. The surviving spouse is the default next of kin and If there is no surviving spouse, then the children of the deceased inherit. If there is no spouse or children, then parents inherit or if no parents survive, brothers and sisters inherit and so on until the nearest living relative is found. The intestacy laws follow what most people would do if they planned.
Planning is not required for the post death transfer of real property. Transfers occur under the administration of the probate court. The problem is the transfer of real property in probate court requires court hearings, takes time and is expensive. But these are not problems for the decedent, but for the decedent’s heirs.
If an owner of real property is concerned about who will inherit the real property or the cost and time of the post death transfer, planning is needed. Most plans are not complete plans. For example, a will is not a complete plan. It does state who will inherit, but a will does not avoid probate administration.
Joint ownership of real property and transfer on death deeds can be complete plans if the intended heir does not predecease the owner. But if the intended heir predeceases, joint ownership and a transfer on death deed are as if the real property owner did no planning.
A gift is a complete plan. But the gift is in effect the abdication of any responsibility and the surrender of control of the real property. Life time gifts also have unfavorable tax consequences when compared to post death transfers of real property.
A complete plan is trust. A trust identifies heirs, avoids probate and provides for contingencies if the original plan does not come through. A trust does not have unfavorable tax consequences and can be changed.
An owner of real property has two options for the post death transfer of real property. Either plan ahead or let the probate laws of California take their course. Planning has many forms; trusts, joint ownership, life time transfers and transfer on death deeds. No planning involves the laws of intestacy and probate administration.
Surprises Await for Non-spouse, Co-owners of Real Property in California
An unmarried, sole owner of real property in California often avoids probate by adding a co-owner in joint tenancy. This post identifies the perils of joint tenancy and viable alternatives.
Adding a joint tenant co-owner who is not a spouse to real property opens up the possibility of many unintended consequences. This post identifies the perils of and alternatives to co-ownership. The unintended consequences are; unfavorable tax treatment, exposure to the new owner’s creditors, relinquished control to sell and mortgage the real property and failure to transfer due to an unplanned order of death. Viable alternatives to joint tenancy are Transfer on Death Deeds and revocable living trusts.
Joint tenancy is a form of co-ownership of real property where more than one person owns the real property and each owner has equal ownership. Every joint tenancy includes a "right of survivorship" such that, upon the death of one joint tenant, the deceased joint tenant's share of the asset transfers to the surviving joint tenant or tenants at the moment of death without the need for probate administration.
Title is cleared by recording an affidavit of death of joint tenant with a death certificate attached. Joint tenancy overrules wills and trusts. This straight forward change of ownership is fairly easy to understand and is low in cost.
The first surprise with joint tenancy is unfavorable tax treatment. The new joint tenant’s ownership interest is increased to fair market value for the property tax base.
The next surprise is an increase in capital gains tax. Lifetime gifts of real property transfer the original owner’s purchase price or “basis” to the new co-owner. Death transfers of real property receive an adjusted basis to fair market value as of date of death. So, for lifetime transfers of real property with a low purchase price compared to a higher current market value the result is an additional capital gains tax on the subsequent sale of the real property.
The second surprise and peril is the new co-owner. The new co-owner’s creditors can use the real property as a source of repayment. Additionally, the new co-owner must sign off on any sale or financing that uses the real property as collateral. A new co-owner takes away control from the original owner.
An alternative is a deed recently created by the California legislature, the Revocable Transfer on Death Deed (“TODD”). A TODD does not change ownership and as a result has no unfavorable effect on property tax and capital gains tax. These deeds are straightforward and low cost.
The major drawback is title companies are reluctant to issue title insurance for 3 years after the death of the owner. This in effect prohibits the sale or use of the real property as loan collateral by the new owner for a period of three years. Another drawback is a TODD cannot provide for a contingency if the intended heir dies before the owner.
Another viable alternative is a trust. The problems with a trust, is the cost and probably more importantly, its complexity. Trusts are not easy to understand and require transfer of real property to the trust. This requirement of trust ownership is often overlooked which results in probate administration. But a properly funded trust allows for contingencies, avoids probate, is private and has favorable property tax and capital gains treatment.
The unintended consequences of adding a co-owner to real property are; unfavorable tax treatment, exposure to the new owner’s creditors, relinquished control to sell and mortgage the real property and failure to transfer due to an unplanned order of death.
Viable alternatives to joint tenancy are Transfer on Death Deeds (“TODDs”) and revocable living trusts. But TODDs are new and not fully tested. Trusts are complicated but when properly funded avoid probate, are private, do not create unfavorable tax consequences and the owner maintains control of the real property.
This post was authored by Mark W. Bidwell, an attorney located in Orange County, California. Office is located at 4952 Warner Avenue, Suite 235, Huntington Beach, California 92649. Telephone is 714-846-2888. Email is Mark@DeedandRecord.com
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Questions? E-mail to Mark@DeedAndRecord.com or call 714-846-2888
Mark W. Bidwell, Attorney at Law
4952 Warner
Suite 235
Huntington Beach, CA 92649
ph: 714-846-2888
Mark