Options to Consider When Designating Title to Real Estate
Title to California real estate can be held in several diverse ways and depending upon your situation a proper designation of title can be a financially lucrative decision which will affect your heirs. The following options are available means to hold title to real estate and should be considered in your estate plan.
Revocable Trust Holds Title
The best option to hold title to real estate is usually to place the real estate into a revocable trust which will hold title to the real estate rather than any specific individual or individuals. The benefit of placing real estate in a trust and designating the trust as the owner of the property are first and foremost that the real estate will not need to be distributed upon death through the probate process. Probate fees on real estate transferred through probate will be based upon a percentage of the fair market value of the real estate. For example, probate fees in California are 4% of the first $100,000 of the gross value of the probate estate, 3% of the next $100,000 and 2% of the next $800,000. If you own a home in your name that is worth $1,000,000 the probate fees would be $23,000 regardless of the equity in the home. Furthermore, if you become incapacitated prior to your death and placed under a conservatorship there will be extensive conservatorship fees related to management of your real estate. After the grantor’s death the trust will become irrevocable and once the irrevocable trust holds title and distributes real estate the beneficiaries will receive a step up in basis under 26 U.S. Code § 1014.
Another option for holding title to property is the Joint Tenancy which specifies two individuals as owning equal and surviving interests in the real estate. A joint tenancy avoids probate but will not avoid a conservatorship if you become incapacitated. Additionally, a transfer on death by way of a title held in Joint Tenancy does not provide the survivor with a step up in basis for tax purposes on the portion of property that was held by that individual only a step up in basis for the decedent’s transferred share of interest. Further, a title held in Joint Tenancy is susceptible to creditor’s claims and debts of the parties while living or upon death.
A community property asset automatically passes upon the death of the first spouse to the surviving spouse and receives a step up in basis but upon death of the surviving spouse the property will need to go through probate. A petition will need to be filed to transfer ½ of the title to the surviving spouse.
Community Property with Right of Survivorship
Basically, this is the same as title held in community property except that the decedent’s ½ half interest transfers immediately upon death to the surviving spouse without the need to file a petition to transfer title.