Who owns what? Trusts, joint tenancy and more…

Posted by on Mar 14, 2013

I know many of you have recently refinanced your houses, and this can affect your trust, albeit temporarily.   Very often – but for no good reason – a lender will ask you to remove your house from your trust before you refinance, placing title back in your name as an individual or married couple with a recorded deed.  Some lenders will do this for you.  Others will send you to an attorney to do this and I have recorded many such deeds in recent years.

The trick is to make absolutely sure that when the refinancing process is complete, your house is retitled back in your names as trustees of your trust.  Many of you have come to me lately to prepare deeds putting your house back in the trust, and I am happy to do this.  Others have found that their lender didn’t take the house out of the trust, so all is well.

What we don’t want to have happen is for you to neglect checking whether your house is in your trust post-refinance.  Then years may go by, you’ll die and your heirs will find that the purpose of your trust – avoiding probate – has not been accomplished.  Short of a full probate, there is a procedure an attorney can do to request a court order placing title back in the trust post-mortem.  But this incurs court costs and attorney fees, which is what you’re trying to avoid when you make a trust.

My advice is that after you have completed a refinance, double check to see if your house is still titled in your name as trustee of your trust.  How do you do this?  You may call your County Assessor, give them your name and parcel number and they will tell you if the “last recorded deed” shows your house in the name of a trustee.  If not, that means you need to call me or someone else to help you prepare a deed restoring title to your name as trustee of your trust.

Another way to check is to look at your property tax bill.  If your house is on record with the Assessor as being in a trust, your bill will indicate that.  Depending on the county you’re in, your property will be titled with your name(s) followed by an abbreviation such as “TR” or “T’ee.”  That means the County Assessor understands that your house is held by you as trustee(s) of a trust.

And while we’re on the subject of how real property is titled, I remind clients often about the perils of owning property in joint tenancy with another.  Joint tenancy is a legitimate form of property ownership but it is not appropriate in many cases.  Joint tenancy simply means that when two or more people own an asset, when one of them dies, the surviving owner or “tenant” already owns the property or asset 100%.  The survivor gets it.  As I’ve discussed in other issues of this newsletter – and it’s a subject I’ll revisit in the future – that may or may not be what you want to happen.  (Prime example:  Mary has three children and owns her house with one child as joint tenant. Upon Mary’s death, by law the house belongs to the child who is the other joint tenant, not the two siblings, despite what Mary’s will may say.)

When married people buy houses, many title companies erroneously label their deeds “husband and wife as joint tenants.”  This is incorrect.  Title should read:  “husband and wife (or wife and husband), as community property with right of survivorship.”   For many of you, I have fixed your joint tenancy deeds to say “CPwROS” before I have you sign a subsequent deed putting title in your names as trustees.  The reason we do this is to make it easier on a surviving spouse.  When property is owned as “CPwROS,” then when one spouse dies, the property is automatically entitled to a “double step up” in basis.  That means that whatever the original cost basis was upon purchase, the new basis is the value on the date of death of the first spouse.   Joint tenancy property gets a stepped up basis on only half the value if there are two joint tenants.  Property titled as community property gets a stepped up basis on the full value of the property.

It is important for a surviving spouse to receive the full stepped up basis because, for example, if she goes to sell the property, the capital gains tax owed will be calculated as sale price, minus (new) basis, times the rate of taxation.  She will want that basis to be as high as possible in order for there to be little difference between sale price and (new) basis.  Again, if a property is owned in joint tenancy, she will get a step up on only half the value of the property.  Of course, she could explain to the IRS that even though the property was titled joint tenancy, it was purchased (usually long ago) with community property, and the IRS will then grant the double step up.  But that requires a widow to have to clear this up with the IRS.  I find it much easier to simply fix deeds that say “joint tenants” and put the house in a couple’s names as community property, and then there will be no question about entitlement to a double stepped up basis.  This is why for many of you, I have prepared two deeds:  one to put your house in community property and a second to put your house in your names as trustees of your trust.

The words on a piece of paper called a deed have legal implications.  Take time now to  make sure your property is titled so as to accurately reflect your intentions about how it is owned and how smoothly it will pass to your loved ones upon your death.