Buying a new house, also known as “Taking Title”, is always a monumental decision; for most people, the equity they have in their homes represents their entire life savings, and it’s the most important and expensive thing that they’ll ever buy in their lives. So, as you might expect, the law does not make it simple.
Complicating matters is the fact that most home buyers acquire their houses as part of a marriage, meaning that two different people own the exact same property at the same time.
So, from the moment you buy your home, you’ll need to decide the type of marital ownership that will be part of the title, which will affect the property’s legal issues down the line: for example, what kind of taxes your heirs might pay, and even who inherits the property when you die.
Didn’t know there were so many different types of property ownership and ways of Taking Title? Well, welcome to Property Law 101. It can seem complicated at times, but you can’t make an informed decision about the title to your home until you grasp these basic concepts. There are three typical ways for more than one person (like those in a marriage) to “hold title” in a property: Joint ownership, community property, and a special kind of community property that includes what’s called a “right of survivorship”. There’s also a less typical fourth method — which we actually think is the best — and we’ll talk about that in just a minute.
1. Joint Ownership
This is when two people, such as a husband and wife, each completely own the property together. This means that each person owns 100%, rather than a 50-50 split, so when one person dies the other continues to own 100%, rather than the deceased person’s “half” passing to another person. This is obviously a drawback if you wanted to leave part of the property to anyone, and the surviving spouse will get hit with a capital gains tax from the improvement in the status of the ownership.
2. Community Property
Unfortunately, the community property options don’t look much better. In community property states like California, each spouse retains a 50% interest in any money or property acquired by either one during the marriage. That means that when one spouse dies, half the property goes into probate, and then the whole property goes into probate when the other spouse dies (and because of that, the first half gets probated twice). Probate remains an expensive and time consuming process, however, and there’s no reason to put your family — or your assets — through that.
3. Right of Survivorship
Adding a “right of survivorship” to community property improves that, making it a sort of hybrid between the other two: it avoids an initial probate process for the first spouse (as if it were a joint ownership), but there’ll still be a full probate when the other spouse passes, and either way the first spouse’s creditors could still target the property.
So, what to do? There exists a fourth option for Taking Title, known as:
4. Revocable Living Trust
This method avoids probate completely, for either spouse, and guarantees that it can’t be targeted by creditors, predators or even future spouses. It can also trigger certain tax benefits (too complicated to discuss here) that can occur when a property is inherited through a living trust. Arranging for this kind of ownership takes a bit more effort ahead of time, but the benefit down the road remains enormous.
Want to hear more about how to set up a revocable living trust? We’d be happy to help you. Contact the attorneys at Vaksman-Khalfin for an appointment and we’ll go over all the details.