How to co-own your home in California is a decision with consequences. What happens if you were to die or divorce is heavily dependent on this decision. Options to own are; in name only, with the right of survivorship, as a trust, or as a business entity.
Transfer on Death
The major distinction between these options is, in the event of the death of an owner, will the transfer be in or out of probate court? Probate is a set of California laws that determine who inherits and how. Change in owner requires a filing in court and an order from the court on who inherits. Probate is time-consuming, expensive, and a matter of public record.
Divorce
Any real property owned in California by both spouses is community property in a divorce. Both spouses will have an interest. Separate property belongs to the owner. But the owner cannot add the other spouse as an owner. Separate property requires a trust.
Tenants-in-common
Two or more individuals who own in their names only are tenants-in-common. A tenant-in-common owner transfer in probate court to his owner’s heirs. Heirs are determined by California law or by will. The surviving co-owner may not be the heir and may have a new co-owner.
Right of Survivorship
Co-owners can avoid probate on the death of the first owner with the magic words “as joint tenants.” Joint tenants have the right of survivorship. A surviving joint tenant owner inherits the deceased owner’s interest without probate court.
Another of form of joint tenancy ownership in California is “as community property with the right of survivorship.” This right of survivorship is for married couples only. In addition to the right of survivorship, this phrase allows for a full step-up in the basis of the real property to fair market value. Step-up in basis can reduce capital gains tax.
Many states allow the right of survivorship with the phrase “as husband and wife.” This is not true in California. In California, the phrase “as husband and wife” does not provide the right of survivorship. The surviving spouse requires a court order from the probate court to inherit. What will work is a trust.
Trusts
Another way to own real property in California is as a trustee of a trust. Trusts are similar to wills. A trust states who inherits and under what conditions. A major advantage of a trust compared to a will is, a trust avoids probate. A will does not avoid probate. But for a trust to avoid probate, the real property must be owned by the trust. A trust does not provide asset protection that a business entity does.
Business Entity
Real property owned by a business entity such as a limited liability company or corporation avoids the probate courts and the recorder’s office. Ownership transfer is internal according to the operating agreement of the business entity. Business entity owners are for rental property, not personal homes. Business entities in California incur at a minimum, an $800 state tax.
Conclusion
Options to co-own are; in name only, with the right of survivorship, in trust, or as a business entity. The major distinction between these options is the death of the real property owner, and how will the real property transfer. Will it transfer in or out of probate court? Probate is time-consuming, expensive, and a matter of public record.
This post was authored by Mark W. Bidwell, an attorney located in Orange County, California. Telephone is 714-846-2888. Email is Mark@DeedandRecord.com.