Dear Mr. Miller:
I am going to make it short and simple: How do I take title with my wife on a house we are about to purchase? This seems like such a simple concept and yet, the real estate broker and escrow officer just give me a list and ask me to choose. I am so confused, community property with right of survivorship, joint tenancy, tenancy in common, the list goes on. Just tell me which one is the best so we can move forward!
Best Form of Title Myth: As with most things, what seems simple, never is. Form of title falls into the same quagmire. Why? Because the “best” form of title depends on a myriad of different, seemingly unrelated factors, that vary from person to person.
Inheritance Preference: The starting point, in my mind, is who do you want to inherit from you if you die first, and what about the reverse–what does she want? The answer seems obvious–your spouse–in which case joint tenancy or community property might be appropriate. But what if this is a second marriage and you have children from a first–does that change your opinion. After all, if the kids are not hers, will she leave the house to them when she subsequently dies? Are the kids minors? That, too, would change, the determination of “what is best” and maybe argue for some type of trust to hold title.
Liability Issue: Is liability something about which to be concerned? Do either of you own a business? If the business goes under, will there by extensive debts? Or do either of you drive? Driving is a “high risk occupation.” Although this probably doesn’t happen often, what if your spouse runs a red light and causes an accident in which the other driver dies. If that other driver is, for example, an orthopedic surgeon with 5 minor children, your wife is going to get sued for many times the limits of her coverage on the auto insurance policy. Assuming the insurance policy is insufficient to pay off the entire court judgment against her, the surviving family may look around for other assets from which to collect. All community property is typically liable for that debt; that is generally not the case for tenancy in common or even joint tenancy.
Probate Avoidance: Is avoiding Probate important? Although there is rarely a Probate proceeding when one spouse dies and the other spouse is inheriting, that cannot be said for the second death. If you are leaving everything to the children on the second death, then this is usually a significant concern of the parents. Do you two already have a living trust? If so, then wouldn’t that be an appropriate title holder? Of course, that does not resolve the liability issue discussed above.
Capital Gain Tax: Are you worried about capital gain tax down the road? Community property has tax benefits here when one spouse dies; i.e. the IRS forgives the tax on all of the appreciation at that point in time (“step up in basis”) as opposed to only forgiving one-half of the appreciation for most of the other forms of title. Since real estate is generally projected to increase in value, community property becomes an attractive option. (By the way, community property form of title can be combined with a living trust.)
State of Residence: What state do you live in? Different states recognize different forms of title. And, although a California couple (where community property is recognized) could hold title to New York land (where community property is not recognized) in community property format, it would require a document saying so outside of the normal New York processes.
Community Property With Right of Survivorship: What of community property with right of survivorship? This has been an option in California for the last 5-10 years. The “right of survivorship” tag line means it all goes to the survivor of the spouses when the first one dies. That being said, I have never used this form of title and I have never run into another attorney that has used it. Why? In California, and I suspect most states that recognize Community Property, unless there is a Will that says otherwise, it all goes to the survivor anyway.
As you can see, the answer to your question is complex and is outside the scope of expertise of the real estate broker or escrow officer. You need to consult with an experienced estate planning attorney to determine what is appropriate. When we sit down with clients to discuss estate planning (around which your question revolves), we ask all of these questions and more to come to a determination. And do keep in mind that form of title can usually be changed even after the purchase is complete.