How Titling Property can affect your Estate Plan by John C. Martin
The myriad options presented to homebuyers when titling real estate have significant
tax, asset protection, and estate planning consequences. Failing to consider these issues often results in unanticipated taxes,
liability, fees, and headaches. This article discusses a variety of potential pitfalls that should be considered when purchasing
or re-titling property.
First Pitfall: Failure to plan for Probate
way homebuyers title real estate determines whether a probate will occur. You might ask, what is Probate and why should I
be concerned about it? When people talk about Probate, they are referring to the court-supervised administration of estates.
Under California Probate Code §§10800 and 10810, probate fees for the each of the attorney and personal representative
are 4 percent on the first $100,000, 3 percent on the next $100,000, 2 percent on the next $800,000, and so on. These fees
are calculated on the gross (not the net) value of the estate.
For instance, let’s say that Jim, who is not married,
dies owning one asset, a house worth $1,000,000 with a mortgage of $500,000. Jim’s house is titled in his name alone.
Jim’s will leaves the house to his three children, one of which is named as personal representative. The probate fees
here would be as follows: $23,000 to Jim’s attorney (plus any "extraordinary fees") and $23,000 to the personal
representative (if he/she decides to take a fee). The minimum fee for this probate is $23,000, however it could easily rise
to $46,000 or more. As noted above, these fees are calculated without taking into account the $500,000 mortgage, because the
charged on the gross (not the net) value of the estate. As you can see, Jim’s
estate does not have enough liquid assets to cover the expense of the probate!
How can Jim avoid probate fees? First,
he could establish a revocable trust and transfer the property to himself as trustee. In that case, the asset would not have
to pass through a probate procedure, because it would be transferred directly by a successor trustee. However, Jim needs to
make sure that his trust is fully "funded" at the time of his death. Otherwise, a probate might still be required.
Often, trust documents appear to be valid on their face, but the underlying assets have not been funded to the trust. Jim
should seek an attorney’s counsel in order to ensure that his trust is funded and remains that way.
What if Jim
never establishes a revocable trust? Could he get by with joint tenancy? If Jim were married, he could avoid probate at the
death of the first spouse by owning his real property as in joint tenancy with his spouse. Joint tenancy means that two (or
more) people own property in equal shares. On the death of either person, the entire interest automatically passes to the
remaining owner, and probate is avoided. Of course, on the death of Jim’s spouse, the real estate would still be subject
to probate. In addition, titling property in joint tenancy without consideration of whether the property is separate or community
may result in unintended tax consequences (see below). Also, Jim might benefit from some estate tax planning, which may be
better facilitated when planning with trusts. Ultimately, ownership of the property in a funded revocable trust while giving
full consideration to the real estate’s community property status and estate tax issues will give Jim the best protection.
Second Pitfall: Listing your Child on the Deed
What if Jim
owns his property jointly with one of his children? The idea of listing a child on a deed as a joint tenant often appeals
to parents. This approach appears to offer a simple, cheap way to transfer property on death, avoid probate, and perhaps even
avoid taxes. However, adding a child to the title of your house could result in disastrous consequences, both during life
and at death. At the end of the day, it is rarely advisable to take this "shortcut."
First, owning a home
in joint tenancy exposes the parent to liability for the child’s actions. For instance, the child’s gambling habit
or addiction may put the real estate at risk. Or, say that the child is involved in a car accident. In such case, the court
could place a judgment lien on the child’s interest in the property. This is true regardless of whether the parent’s
sole intent was to facilitate a transfer of real property at death.
Second, naming a child on the deed often frustrates
a parent’s overall estate planning objectives. A parent may want their children to live in a home as long as they are
under age 18, or for the home to be sold and the proceeds distributed equally among multiple children. Alternatively, a parent
might wish for one child to have the family home, but the other child to be compensated with liquid or business assets. A
will or trust may provide exactly how property should be distributed, or empower a trustee with discretion to distribute such
property. As parents often forget, however, a joint tenancy interest passes outside of the terms of one’s will or trust.
While a will may clearly provide for equal distribution, this makes no difference as far as the joint interest is concerned.
As a result, one child may get an inheritance boost, while another may wind up with a smaller proportionate share of the estate.
Third, and perhaps most important, adding a child’s name to a property can result in disastrous gift and estate
tax consequences. If the child has not contributed an equal amount of money as
parent when purchasing a home, the parent could be liable for a gift tax in the year the home was purchased or transferred.
Later, after the parent dies, the entire value of the home will be included in that parent’s estate for estate tax purposes
unless it can be established that the child contributed to the purchase. In view of both the gift and estate tax consequences
of holding property with a child, it is rarely advisable to pursue this approach!
Third Pitfall: Failure to consider
Basis Step up
The way in which homebuyers title property affects the basis "step-up." What does "step-up"
in basis mean and how does it affect me? Generally speaking, when property is sold, capital gains are recognized on the difference
between the basis (the purchase price) and the sales price. At death, however, the basis of an interest passing by will or
trust to a surviving spouse "steps up" to the value as at the date of death. As a result, the sale of property after
a full basis step-up often results in substantial capital gains tax savings.
However, married persons may only receive
a partial basis "step-up," limited to one half of an appreciated property at the death of the first spouse to die,
if the property is not held as community property. By contrast, both halves of an asset held as community property will receive
a full step-up upon the surviving spouse’s death. In general, therefore, community property is usually the best form
of ownership when property has a low basis or will most likely appreciate in the future. An attorney can assist married couples
in determining whether property is community or separate.
Before running to the title company, remember that numerous
other factors, not all of which are discussed in this article, should also be considered. These factors include: whether the
property has depreciated in value such that a partial step-down in basis would be desired; whether more
advanced strategies such as bypass trusts would warrant titling property as tenancy in common; or whether the
property will be held in a revocable trust. This does not even touch the family law issues involved, or some of the more nuanced
asset protection rules. Because so many factors are involved when titling property, it is advisable for individuals in California
to consult with an attorney about how property should be held, while keeping in mind the goals of (a) basis "step-up"
for California and Federal income tax purposes; (b) probate avoidance for the entire transferred interest; (c) the marital
deduction for estate tax purposes; (d) asset protection and (e) minimizing liability.
Kauai Mayor Signs Bill No. 2339. Here is the press release:
Mayor signs open density bill
LĪHUE – Mayor Bernard Carvalho, Jr. recently fulfilled a promise
he made when elected to put forward legislation that would lessen the proliferation of dwellings on land zoned county open
and agriculture districts.
On Tuesday, the mayor signed Bill No. 2339 relating to development standards in the open
district that significantly reduces the allowable density and number of lots that can be created.
Noting that efforts
to control sprawl on agricultural land have been ongoing for nearly a decade, the mayor said, "Through lessons learned
from those past efforts, meetings with stakeholders, and diligent legal analysis by the county attorney‟s office, the
administration was able to hone and codify a set of legal mechanisms that was recently passed largely unchanged by the County
The draft bill was submitted to the Planning Commission in August of last year, and was passed by the
County Council on May 12.
Under the new law, a maximum of five units can be built on all open zoned parcels, while
county open district zoned lands are now subject to stricter subdivision standards.
A parcel that is 50 acres or less
in a county open district may be subdivided into lots that are at least five-acres in size.
Parcels that are larger
than 50 acres but less than 300 acres may be subdivided into 10 or less lots, none of which may be smaller than five acres.
If a parcel is over 300 acres in the county open district, subdividing the parcel must be done in accordance with the
A maximum of 75 acres may be subdivided into no more than
10 parcels, none of which may be smaller than five acres.
An additional 20 percent of the total parcel area or 300 acres, whichever is less, may be subdivided into parcels
that are no less than 25 acres in size.
The balance of the parcel
may not be subdivided.
The intent of
this ordinance is to close the county open district "density bonus" as discussed in the Kaua'i General Plan by imposing
controls on the development of land zoned county open and agriculture districts within the state Land Use Commission agricultural