For those of you who read this column regularly, you may remember me reviewing several ways you can hold title (own property), each of them with different tax implications and several of them influencing how you could pass that property on to family members. As of January 2016, the California Legislature added a new type of ownership via Assembly Bill 139.
The ownership made possible by AB-139 is called a revocable transfer on death deed. It allows you to deed your single-family residence (with one to four units) to anyone and have that transfer take place the moment you die: the transfer is automatic. It supersedes other legal documents including a will or trust, and while it shares some characteristics with joint tenancy and community property with right of survivorship, it is unique because the beneficiaries do not have any equity (ownership) in the property until the death of the grantor.
As a quick review, other ways of holding title include tenants in common, which are often friends or associates who jointly own a property. Joint tenancy is similar to tenants in common, except that when one tenant takes his or her last breath, the other tenant owns the property immediately, subject to any valid liens. No probate. No will. No hassle. And half of the property value is stepped up (or revalued to market value). Consequently, this arrangement is often used among family members.
To have joint tenancy, all parties must have the same percentage of ownership and must acquire title by the same deed. A joint tenancy can be created by tenants in common deeding to themselves as joint tenants after they own the property. But unlike tenants in common, they must have equal ownership. Any of the individuals can sell their share, but that immediately invalidates the joint tenancy status and a tenancy in common is created between the remaining owner(s) and the new owner.
Community property is often the way spouses own property together. Each has the same share, and the liability is the same as with a single owner. One of the benefits of community property is how it is valued for tax purposes if one spouse dies. Both halves of the home are stepped up and the remaining owner does not have to pay capital gains tax on the increased value.
This new way to hold title, the revocable transfer on death deed, does not go through probate, and as the title indicates, it is revocable. So if after granting a property to your favorite niece and her fiancé, your niece calls off the wedding, you can immediately remove the fiancé from the deed. You need not jump through a big legal process to remove someone, and because the beneficiaries hold no ownership (equity) in the property until you pass away, you do not need their permission to remove them.
A revocable transfer on death deed could be a good option for a newly married couple as a way to transfer pre-marital property to the spouse upon death. It also protects you, in the event that things don’t work out, since you can revoke the deed at any time.
Once the property owner dies and the deed is transferred to the beneficiary, the property is still subject to liens. If, for example, you owed $500,000, the property is still encumbered after the transfer. This would apply to liens of any variety, including option/lease agreements or easements, not just monetary liens.
The moral of the story is this: get off the couch and talk to your attorney and accountant about estate planning, wills and trusts. They (and not I) are the people to talk to about the details of your particular situation. I just like to provide food for thought.
If you have questions about real estate or property management, please contact me at firstname.lastname@example.org or visit www.realtyworldselzer.com. If I use your suggestion in a column, I’ll send you’re a $5.00 gift card to Schat’s Bakery. If you’d like to read previous articles, visit my blog at www.richardselzer.com. Dick Selzer is a real estate broker who has been in the business for more than 40 years.