How Should Your Clients Take Title to Their Home?
A Home Titling Guide for Professionals
By Rebecca Easton, Attorney and Counselor at Law
How Many Times Has a Client Asked You, “How Should I Take Title to My New Home?”
As estate planning professionals, we’re often asked by clients how they should title their home. Properly titling a home is crucial for ensuring that the property remains secure, accessible, and in the right hands in the future. This guide provides you with a deeper understanding of the most common forms of property title and the potential pitfalls that can arise. When you guide clients to title their property effectively, you offer them lasting peace of mind, knowing that their loved ones will be protected.
Why Is Correctly Titling Property So Important for Homeowners?
There are three main reasons why it’s essential for homeowners to title property correctly:
- Control: Improper titling can restrict a homeowner’s ability to control what happens to their property after their death.
- Asset Protection: Incorrect titling can leave property vulnerable to creditors, the government, or even former spouses, jeopardizing heirs’ inheritance.
- Tax Implications: Incorrect titling can result in significant tax burdens, particularly capital gains tax, upon the sale of the property.
Let’s explore the most common ways to hold title, the risks associated with each, and the optimal way to protect a client’s most valuable asset: their home.
Three Common Ways to Hold Title
1. Joint Tenancy with Right of Survivorship
This form of ownership is popular among homeowners but comes with significant limitations. When property is held in joint tenancy, both owners have equal ownership, and upon the death of one owner, the property automatically transfers to the surviving joint tenant. While this may seem simple and convenient, it has drawbacks:
- Lack of Control: The first owner to pass away has no say over what happens to the property after their death. This can be problematic if there are specific wishes about its use or distribution.
- Probate Requirement: Upon the death of the second joint tenant, the property still requires probate, a lengthy and costly legal process.
- Capital Gains Exposure: When the surviving joint tenant sells the property, they may be required to pay capital gains tax on up to half of the property’s appreciation since its original purchase.
Best Suited For: Joint tenancy may be an option for couples looking for simplicity, but only if they are fully informed of the probate and tax consequences.
2. Community Property
Community property is common for married couples in community property states, including Arizona and California. It allows both spouses to own an equal share of the property, which may help with capital gains tax by allowing a step-up in basis. However, this form of ownership has its drawbacks:
- Probate Required: Half of the community property typically goes through probate upon the first spouse’s death, and the entire property goes through probate when the second spouse dies. Probate is costly, time-consuming, and can delay heirs’ access to their inheritance.
- Limited Control Over Final Disposition: After the death of one spouse, the surviving spouse holds full control. This could lead to a distribution that may not align with the first spouse’s wishes, especially in cases where children from previous marriages are involved.
Best Suited For: Couples who want shared ownership with some tax benefits but are comfortable navigating probate upon both owners’ deaths.
3. Community Property with Right of Survivorship (CPwROS)
Community Property with Right of Survivorship attempts to blend the benefits of community property with those of joint tenancy by allowing automatic transfer to the surviving spouse without probate. However, this method has its own issues:
- “Last Spouse Standing” Control: Similar to joint tenancy, CPwROS leaves ultimate control to the last surviving spouse, who may make changes to the property’s disposition that don’t align with the first spouse’s wishes.
- Limited Protection from Probate: While probate is avoided at the first spouse’s death, the property will still undergo probate when the surviving spouse passes away.
Best Suited For: Couples seeking a simple transfer to the surviving spouse but with limited plans for future heirs and beneficiaries.
The Best Way to Own Property: A Revocable Living Trust
A revocable living trust offers homeowners the most control, protection, and flexibility over their property both during their lifetime and after their death. By transferring property ownership into a trust, clients can avoid many of the pitfalls associated with other title forms.
Benefits of a Revocable Living Trust:
- Avoids Probate Entirely: Property held in a trust bypasses the probate process, saving heirs time, money, and privacy concerns. This applies to both the first and second death of married or partnered property owners.
- Maintains Control After Death: With a properly drafted trust, clients can specify how their property will be used, ensuring it goes to their chosen beneficiaries without interference.
- Protection from Creditors and Predators: Property in a trust is safeguarded from potential creditors, former spouses, or others who might lay claim to the assets.
- Capital Gains Tax Relief: When the property is passed to heirs, a trust can often help them avoid capital gains tax, as it allows for a full step-up in basis on the entire property.
- Estate Tax Savings: For larger estates, a revocable living trust helps married couples maximize estate tax exemptions, potentially saving heirs thousands or even hundreds of thousands of dollars in taxes.
Best Suited For: Any homeowner looking for comprehensive protection, control over property disposition, and the opportunity to provide heirs with an inheritance free from court involvement or tax burdens.
Key Takeaways for Professionals
Advising clients on how to take title to their property is an important aspect of estate planning. Here’s a summary of the benefits and challenges associated with each method:
| Title Type | Probate Required? | Control Over Final Disposition | Capital Gains Tax Impact | Best Fit For |
|---|---|---|---|---|
| Joint Tenancy | Yes | Limited | Tax on half of property | Couples looking for simplicity |
| Community Property | Yes | Moderate | Step-up in basis on half | Married couples in community property states |
| Community Property with Right of Survivorship | Partial | Limited | Step-up in basis on full | Simple transfer to spouse |
| Revocable Living Trust | No | Full Control | Tax relief on full property | Homeowners seeking control, privacy, and protection |
Final Thoughts: Making Property Title Decisions Count
Choosing the best way to title a property is critical to fulfilling a client’s estate planning goals. A Revocable Living Trust is typically the most beneficial option, offering privacy, protection, and peace of mind for homeowners and their heirs. As professionals, we have a unique opportunity to guide clients toward the choices that safeguard their family’s legacy and financial future.
By ensuring your clients understand the benefits of titling property through a trust, you empower them to make informed decisions that will support and protect their loved ones for generations.
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