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How people take title to assets determines what happens to the assets at death. In California it is possible to take title to assets in a number of different ways. Title may be taken as
It is possible to take title to an asset in the individual's name alone. Title may be taken in the name of "John Doe, an unmarried man." The decedent's will or California laws regarding intestate succession control who inherits an asset titled in a person's name alone at death.
However, if title is taken in an individual name alone and the person is married, then further questions must be answered as to the nature of the asset. Assets owned by a husband and wife may be the couple's community property, may be their quasi-community property, or may be the separate property of either spouse.
If the asset in question has been acquired during marriage while the couple lived in California or another community property state, then that asset is community property. The surviving spouse is then entitled to one-half of that asset, and the other half will pass by the decedent's will or intestate succession. If the asset was acquired during marriage while living in a non-community property state and it would have been community property if acquired in California, then the above rule will also apply.
If the asset was acquired by a married person either by gift or inheritance during marriage or was owned by the party when he or she married, then the asset is that person's separate property and the person may dispose of all of it at death, without leaving any portion to the surviving spouse.
If title is taken in the name of two or more people as "joint tenants," the asset or assets automatically pass to the surviving joint tenant or joint tenants at death. The joint tenancy supersedes the individual's will. Joint tenancy means "right of survivorship," even though that is not specifically stated.
To have assets in joint tenancy, it is necessary for the words "joint tenants," "joint tenancy," or some abbreviation to appear on the deed, stock certificate, or other document whereby the individuals took title to the assets. "Or" only means joint tenancy with regard to vehicles registered under the California Vehicle Code, United States savings bonds, and United States Treasury obligations.
To terminate joint tenancy and to transfer the asset to the survivor or survivors at death a certified copy of the death certificate is required. This death certificate is furnished to the bank, stock transfer agent, or recorded with a real estate form with the county recorder. No probate or legal proceeding is required.
This form of title is used when two or more people own an interest in an asset or assets and they do not wish it to go to the survivor at death. They also do not have to have an equal interest in the property as they do with regard to joint tenancy. They may have different interests or percentages. Tenants in common is normally used in connection with real property, but it can be legally used with any type of asset. Each party can will away his or her portion of the asset—it does not go to the survivor.
Mary Doe and her brother, Frank Smith, inherit their mother's home. They each own an undivided interest as "tenants in common." If either dies, the decedent may will the undivided one-half interest to anyone the person wishes.
Two couples may buy a home at Lake Tahoe. Title may be taken in the name of "John Doe and Mary Doe, as Joint Tenants, as to an undivided one-half interest, and Frank Smith and Martha Smith, as Joint Tenants, as to an undivided one-half interest." Each couple owns one-half of the property. Within each half they are joint tenants. If John Doe dies, his one-half interest passes automatically to Mary Doe. If Mary Doe later dies then her one-half interest passes by her will.
In California the term "community property" has two separate meanings. First, it refers to the nature of assets acquired by husband and wife during marriage. All of the couple's assets may be community property if they acquired everything since they married.
Second, in California it is possible for husband and wife to take title to assets in their names as "community property." This means that the spouse who dies can will away his or her one-half of the asset, and the other one-half is retained by the surviving spouse.
Since July 1, 2001, husband and wife may also take title as "community property with right of survivorship." This allows a couple to hold assets as community property, with income tax advantges, but have assets pass at death to the surviving spouse without any court proceedings or complications.
To hold title in this manner, both husband and wife must sign or initial the document making the transfer to indicate their acceptance of this title holding.
For various bank, savings and loan associations and credit union accounts, it is possible to take title in someone's name as "trustee" for another party. Title may be in the name of "John Doe, Trustee for Martha Doe." Here there is no trust or document; the registration is merely a way of holding title to an account.
At death, the named beneficiary inherits the account without going through probate or legal proceedings. Normally, only a certified copy of the death certificate is necessary to change title at death. In the above example, Martha Doe has no access to the account of John Doe until his death. At his death she inherits this account and this right supersedes any will or state law on inheritance.
This type of registration cannot be used for securities or real property.
It is possible to take title to some assets in the individual's name P.O.D. with a beneficiary listed. This type of registration applies to bank, savings and loan, and credit union accounts, United States savings bonds and vehicles registered under the California Vehicle Code.
Title may be taken in the name of "John Doe, P.O.D. Martha Doe. " As with trustee registration, this means that at the death of the owner, the asset passes to the named beneficiary. It again supersedes the decedent's will and avoids probate.
This type of registration cannot be used for securities or real property.
"Tenants by the entireties" is an old term used for holding title as joint tenants only between husband and wife. Although many states use this form of title, California does not recognize this form of title holding.
The federal government has a federal estate tax based on the assets owned by the decedent at death. While it is possible to avoid probate by holding title to assets in joint tenancy or in a trustee or P.O.D. or T.O.D. registration, these assets are still taxed at death. If Mary Doe, who owns $900,000 of assets, places her two children on all of the assets as joint tenants, she avoids the probate proceedings at death. However, the full $900,000 is subject to the federal estate tax unless it can be shown that one of the other parties actually put money into the asset. Joint tenancy avoids probate but does not avoid taxation at death.
Merely changing title to assets such as putting property into joint tenancy is sometimes considered a gift and is subject to gift tax.
It is possible to put bank, savings and loan, and credit union accounts into joint tenancy, as well as brokerage accounts, vehicles and United States savings bonds without incurring any gift tax. However, it is a gift to place real property or securities such as stocks, bonds and mutual funds into joint tenancy.
Federal law exempts a spouse from any gift tax if the spouse is a United States citizen. For others, there is a gift tax. In joint tenancy, each joint tenant has an equal interest. Two joint tenants own one-half each; three joint tenants each own one-third, etc.
If Mary Doe owns a $600,000 home in her name alone and puts it into joint tenancy with her two children, they then each own one-third, and she is making a gift to her two children of $400,000 (One-third of $600,000, or $200,000 per child). Gift tax laws allow total cumulative gifts of up to $1,000,000 before a tax is due. However, once property is put into joint tenancy and a gift is made, the party owns an undivided interest. In this example, if one of the children is sued or the tax authorities go after the child, it is possible that the home may be sold and the creditors can reach the child's one-third interest, or $200,000.
Unfortunately, even though there may be a gift, the gift is nullified at death and the entire asset is still taxed for estate tax purposes when Mary Doe dies.
If assets are placed in a tenants in common registration, then the person is making a gift on the proportionate share. If Mary Doe changes title to her home so that she and her daughter now own the property as tenants in common, they each own an undivided one-half interest and Martha Doe has made a gift to her daughter of one-half of the value of the property. At death, this one-half is not taxed in Mary Doe's estate.
If a married person has property in his or her name alone which is that person's separate property and changes title to the asset to "community property" with the spouse, then the person is making a gift of one-half of the value to the spouse. Again, the spouse is exempt from gift tax if a United States citizen.
To determine how title is held, it is necessary to look at the various documents for institutions showing title.
Title to real property is shown on the deed when the person or persons acquired title. The original deed needs to be examined or the deed acquiring title if there was a later deed. The county recorder or a local title company may be able to help.
In California if someone loans money in connection with real property, he or she gets a note from the borrowers and also a deed of trust, which places a lien on the property in the lender's favor. Title to the deed of trust (where one is the payee or lender, not the borrower) is shown on the deed of trust.
Title to a brokerage account is shown on the account itself. Title may be abbreviated such as "Jt. Ten." or "JTWROS." Or, it may be another type of registration. The brokerage firm should be consulted if there are any questions.
A note covers money lent and lists the name or names of the borrowers. If two or more people are listed as the borrowers, the note should indicate how they hold title to this note.
Stocks and bonds which are not held by a brokerage firm are usually evidenced by certificates. If the certificates are in the name of two or more people, they should state how title is held. This may be abbreviated, such as "JTWROS," which stands for "joint tenants with right of survivorship." The certificates may instead read "TEN COM," which means "tenants in common," or "COM PROP," which stands for "community property."
When someone owns a mutual fund, he or she normally does not get certificates for the shares held in the fund but a statement which may come monthly, quarterly, semi-annually, or annually. The statement shows how title is held if it is in the name of two or more people.
It is possible to obtain certificates for shares in a mutual fund and if a certificate or certificates are issued, the rule for stock certificates will apply.
A stock reinvestment fund is a fund which reinvests dividends into more shares in the company. The individual or people may have certificates for the shares purchased and also own shares held in the dividend reinvestment account. The shares held in this account are not issued and are treated similarly to mutual fund shares. The quarterly report from the agent shows how title to the reinvestment account is held.
United States Treasury obligations are United States Treasury bills, notes, and bonds. They can be purchased and held by a bank or brokerage firm, or they may be purchased through what is called a "Treasury direct account." This is an account whereby the investor or investors receive a periodic statement on the assets owned. No certificates are issued.
The Treasury direct statement shows how title is held. If the term "or" is used, it indicates joint tenancy.
United States savings bonds refer to the E, H, EE and HH bonds. These can be in individual name, in the name of two people (but not more than two people) as "or," which is treated as joint tenancy, or in a "P.O.D." registration, whereby a beneficiary is listed.
An interest in a limited partnership is shown on the partnership books. The general partner should be able to determine how title is held. Sometimes, but not always, the title registration is shown on the annual income tax form issued by the partnership, which is a "K-1" Internal Revenue Service form.
The term "vehicles" refers not only to automobiles, but to other items which can be registered under the California Vehicle Code. This includes RVs, motorcycles, trailers, trucks, boats, and other types.
The certificate of ownership shows how title is held. If the term "or" appears, then the vehicle is in joint tenancy. If the term "and" is used or there is a slash "/" it is treated as tenants in common, and each owner owns an equal share. If it is listed in a P.O.D. registration, then there is a named beneficiary who inherits at death.
Other assets may include a copyright for a publication or music composition, an animal such as a thoroughbred horse or dog, an airplane, a large boat registered with the United States Coast Guard, or some other item. In each case the certificate or document of registration must be examined to determine how title is taken.
Assets which do not have a certificate or document of registration are considered owned by the person who physically has the item.
Safe deposit boxes can be set up so that there are several signers. Even though more than one person may have access to the box, the contents are not considered to be held in "joint tenancy" and do not pass to the other co-signers. If bearer bonds or coins are in a safe deposit box they do not automatically go to the other co-signers on the box.
Sometimes the names of two or more people are on a certificate or document but there is no indication as to how title is held. Title may be in the name of "John Doe and Mary Doe" or "John Doe and Mary Doe, Husband and Wife."
If the document shows the parties to be husband and wife, then title is treated as if it was registered in community property.
If title is in the name of two people and they are not shown on the document to be husband and wife, title is treated as tenants in common, with each party having an equal interest.
Title is never presumed to be joint tenancy.
"Cost basis" refers to a person's income tax basis in an asset. If one buys stock for $5,000, and later sells it for $10,000, the cost basis for determining the gain or loss is $5,000, and if more is received for it at the time of sale there is a capital gain.
Assets get a new valuation or cost basis at death. The new value is the value of each asset on the federal estate tax return filed for the decedent. If no federal estate tax is filed, then the new cost basis is the fair market value at the date of death. Mary Doe paid $5,000 for stock and kept it until she died. At her death the stock was worth $10,000. Her children get a new cost basis of $10,000 and if they sell the stock they compute their gain or loss on the value at death of death, $10,000, not the original cost basis. The difference is forgiven. This is why many older people keep assets and do not sell them because they escape capital gains tax at death.
For husband and wife, the rules are a little more confusing. If assets are held by husband and wife as joint tenants, then only one-half of each asset gets a new value at the death of the first spouse. If the home was purchased for $60,000 twenty years ago but is worth $360,000 at death, then the cost basis is one-half of fair market value for the deceased person's share (1/2 of $360,000, or $180,000). The surviving spouse, however, keeps his or her original cost basis (1/2 of $60,000, or $30,000). The adjusted cost basis is therefore $210,000 ($180,000 plus $30,000).
If the couple held title to the home in their names as community property, or held the home in a revocable living trust as community property, then both halves of the home get a new value as of the date of death of the first spouse. Here, the home is valued at $360,000, and if it is community property the new cost basis is $360,000.
It is better to hold assets which have appreciated in the couple's names as community property, as community property with right of survivorship, or in a revocable living trust as community property. At the death of the first spouse then all of the community property assets get a new income tax valuation and all capital gains until that point are forgiven.
The above is due to change for persons dying on or after January 1, 2010.
California voters years ago passed Proposition 13, which provided that real property was not reassessed in value unless there was a change in ownership. Death is considered a change of ownership and real property is reassessed for real estate tax purposes at the fair market value as of the date of death.
Mary Doe purchased a home many years ago for $60,000. Her real estate tax bill is $720 per year. She leaves the home to nieces and nephews when she dies. The property is reassessed as of the date of her death for its current fair market value of $360,000. The annual real estate tax bill increases to approximately $4,000 per year.
There are a number of exceptions to reassessment of real property. Any property passing to a spouse is exempt. One can also leave a home of any value and additional real estate with an assessed value of up to $1,000,000 to children without triggering any reassessment. If a child and child's spouse die ahead of a parent and the property passes to the deceased child's children, then these grandchildren are exempt just as the deceased child would have been.
Other than the above, real estate at death is subject to reassessment and the county reassesses the property and mails a supplemental real estate tax bill for the prorated portion of the tax year.
It is very important to review how title is held to various assets. How title is taken determines what happens to the asset at death, in terms of who inherits that asset.
Individuals and couples should review how they hold title and should make a list of the various assets and title holding. If title is not held in the manner desired, it should be changed before death.
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Revised 6/21/2005