Homeownership remains an important symbol of achieving the American dream. Hardworking folks celebrate the fruits of their labor by saving for a down payment and investing in real estate for themselves and their family. The family home becomes a safe haven for shelter, security and special memories. As we grow older and our children progress into adulthood, we are faced with the issue of passing down our assets.
One of the most common questions that we receive are: 1) How do I pass down my primary home to my children or grand-children, and 2) What is the best way to do this legally with minimal tax consequences and costs?
This article discusses four common ways of passing down a home to your heirs: 1) Re-titling property to an adult child’s name; 2) Joint Tenancy with a Right of Survivorship; 3) Tenancy in Common (interest in property only) and 4) Revocable Living trust (our recommended solution).
One method for a homeowner is to re-title the property outright in the name of his adult child by way of a deed. Often times, real property is reassessed at market value, and if it is sold or transferred, then the property taxes can increase dramatically.
Fortunately, in California, it is tax-free to transfer title of a primary residence from a parent to a child, or from grandparents to their grandchildren. Pursuant to Proposition 58, a property transfer between a parent and child is excluded from tax reassessments. Proposition 193 applies the same exemption for property transfers between grandparents to a grandchild. Such transfers subject to the exception are: 1) a homeowner’s primary residence and/or 2) transfers of up to $1 million of real property other than the primary residence.
For example, Father re-titled his primary home by deed to Adult Son. As the new owner, Adult’s Son’s taxes are calculated based on the original base year value, instead of the current market value when he received title to the home.
One disadvantage to this parent-to-child transfer method, is that you forfeit control of the property. Should you want to remain in the driver’s seat, it is recommended that you re-title the property via Revocable Living Trust. The same tax-free exemption is also applied to transfers into a trust for estate planning purposes as discussed below.
Secondly, another solution for passing down property is through a Joint Tenancy with Rights of Survivorship. This transfer method, commonly used by married couples, provides an equal undivided ownership interest to each joint tenant. In a Joint Tenancy, when one of the joint tenant dies, the remainder is transferred to the surviving joint tenant(s). For example, Harry and Wilma acquire their home by deed in National City as Joint Tenants with language that clearly states “a Right of Survivorship”. Upon Harry’s death, Harry’s interest in their home will transfer automatically to Wilma. Accordingly, Wilma will acquire Harry’s interest and own their home outright.
Moreover, another solution for passing down property is through a Tenancy in Common. Each Tenant in Common has an undivided ownership interest in the property with equal right to possess the property, even though the tenants may haveunequal ownership interests. Each co-tenant has the right to transfer his or her ownership interest by deed, will, or other conveyance. Unlike a Joint Tenancy, a Tenancy in Common does not have a Right of Survivorship.
When one co-tenant dies, his or her interest does not automatically pass to the other co-tenants. For example, three Cousins, Ana, Ben and Cate, own equal interests (1/3 each) in a vacation home as Tenants in Common. If Cate dies, then her 1/3 interest passes to her child, Dave, and consequently, Ana, Ben and their nephew, Dave, will then each own 1/3 interest in the vacation home as Tenants in Common.
As a fourth and we believe the best solution for a homeowner, is the re-titling of the home in the name of a Revocable Living Trust. This can be done by executing and notarizing a trust agreement, preparing a quit claim deed, and recording the deed with the County Recorder’s office. For example, Mark and Myra Santos, a married couple, prepare an estate plan with a Revocable Living Trust called “Santos Family Trust”. In order to ensure that their Chula Vista residence would be distributed to their children as beneficiaries, they prepared and recorded a quit claim deed in the downtown San Diego County Recorder’s office to properly re-title the home in the name of “Santos Family Trust”.
This will be a tax-free transfer, and property taxes will be calculated based on the Prop.13 base value instead of the current market value and with annual increases capped at 2%. Furthermore, in addition to the advantageous tax benefits, the main benefit of a Living Trust transfer, is your ability to exercise control over the property and dispose of it during your lifetime. A living trust allows you to remain in the driver’s seat while you are alive, and allows you to make changes only to your Living Trust so that you can just re-title the property once into the name of the Trust.
Ultimately, there are various transfer methods available for transferring real property to your heirs. However, re-titling property via a Revocable Living Trust, provides the best solution for estate planning purposes to ensure your next generation is left with security, shelter, and loving sentiments.