I have been asked the questions many times how should people hold title to real estate in California. Let’s talk about the options.
First and foremost, for anybody that owns real estate in California, the best method is in a California revocable living trust. The other options, below, are a distant second place. Why is that? The main reason is that trust ownership avoids probate after death and it also avoids the need for a conservatorship if incapacity happens during life. It’s really that simple. Probate and conservatorships are extremely expensive and should pretty much always be avoided. So owning a property in a revocable living trust is the best.
However, owning property in a trust is not the only method and there is one primary reason everybody does not have one… they are expensive to set up. You can easily spend $2,500 to have an experienced estate planning attorney prepare a living trust package. That’s a lot of money to just about any of us. Plus there is some work involved to get your assets into a trust. So, let’s say you don’t have a trust… then how should you title your California real estate?
I stress California because other states might have other options. For example “tenancy by the entirety” is something that exists in other states but not in California. TBE may be a great option… if it was legal in California. So that’s a non-starter.
The most common debate in California real estate is if a husband and wife should own property as “joint tenancy,” as “tenants in common,” or as “community property with the right of survivorship.” Which is best for you? Of course, each case is unique and you should talk to your own attorney to get legal advice.
JOINT TENANCY: JT is really the granddaddy of real estate ownership. It’s probably the most common way to own property in California. Joint tenancies have to be equal (i.e. 50/50 or 1/3 to each of three people or whatever is equal for the number of owners) and automatically transfers to the surviving joint tenant (or tenants) upon death. Joint tenancies tend to be a good option but not always the best. One problem is that the survivor does not get a full step-up in basis, at the first death, as they would with a trust or with CPWROS (discussed below). Also, JT is not good if you do not want the property to transfer to the other tenant or tenants.
TENANTS IN COMMON: TIC is commonly for non-married people or any co-owners that want full control for their portion of the real estate. If a deed does not specify otherwise it defaults to TIC in California. TICs also can be used for advanced estate planning purposes by use of a tenancy in common agreement but that is an issue for another day. A TIC is a good option when you do not want the property to transfer to the survivor upon death.
COMMUNITY PROPERTY WITH RIGHT OF SURVIVORSHIP: CPWROS is probably the best option for married couples to own property (other than a trust). This would be for long term marriages or for any marriage for both spouses want the surviving spouse to have their interest in the property. It’s similar to a joint tenancy, in that the property transfers automatically upon death, but the surviving spouse gets a full step up in basis for tax purposes which can be a huge deal in more valuable properties. CPWROS has only been around in California for about 15 years.
COMMUNITY PROPERTY: Before California had CPWROS they had CP (without WROS). CP is good in that it gives the surviving owner a full step up for tax purposes but the property does not automatically transfer upon death. Instead the surviving spouse has to go to probate court and do a spousal property petition. This is costly and time consuming. There are many old deeds that have CP ownership so check your deed as, in my opinion, this can be the worst way to own property.
Other options to own property include limited liability companies (LLCs) but that’s primarily for investment properties and beyond the scope of today’s post.
Thanks for reading! -John