Check your grant deed to see how you hold title to your property
The advantage of joint tenancy is that if one of the owners passes on, their share of the property immediately passes onto the survivor. No will is needed to effect this transfer. However as we see in the next step, Joint Tenancy can cause serious tax consequences. If you own the property as community property or community property with the right of survivorship (typically the ideal way for a married couple to hold title) then the surviving spouse can avoid the negative tax consequences of joint tenancy. For the purposes of this article, I am ignoring any tax breaks the government gives homeowners (ie $250,000 exclusion for primary residence) when they sell their property because these tax breaks always subject to change. If you own the property as tenants in common, you do not necessarily need to make any changes. In either case of community property or tenants in common you will want to make sure that your estate planning documents are up to date.
The problem with Joint Tenancy
If you and your spouse are listed as Joint Tenants, you will want to convert title into community property. The reason for this is that if one of the owners passes on in joint tenancy, the surviving owner only gets a stepped up basis on the portion of the property they did not already own. As an example, A Married couple buys a property for $200,000 as joint tenants, the Husband passes on when the property is worth $1,000,000. The Wife receives husband's share of the property with a stepped up basis of $500,000 but her basis remains $100,000 (1/2 of $200,000). If she sells the property she will most likely have a taxable capital gain of $400,000 ($1,000,000 less basis of $600,000 (500,000+100,000)). This can result in over $100,000 in capital gain taxes. If the couple had simply owned the property as community property, no tax would be due on sale as spouse receives full stepped up basis for community property assets when the other spouse passes on.
Retitle your assets
1. If you are not married, you can convert your title to tenants in common
2. If you are married you can convert your title to community property or community property with the right of survivorship (combines the tax benefits of community property with the immediate transfer of ownership of joint tenancy).
Alternative: If you want to convert your title and avoid the high cost of probate, you will want to create a Living Trust
The one problem with owning real estate in your own name (Joint Tenant, Tenancy in Common or Community Property) is that in California when all owners of a property have passed on, transferring the property to your heirs will require a court administered process call probate which can cost your heirs thousands of dollars and years of delay . As an example if you own a home worth $1 million and have no estate plan, your heirs could pay up to $50,000 in probate, attorneys and executor fees. Even with a valid will, your heirs may still have to pay thousands of dollars in fees. In addition, Probate typically takes 12-24 months to resolver and if minor children are involved, probate may remain open until they turn 18. One additional downside is that probate is a public process and your heirs will become known to any number of legitimate and illegitimate marketing companies.
Create Living Trust and Pour-Over Will
A Living Trust is an entity that you create to own assets such as real estate and business interests. A Living Trusts allows your successors to transfer these and other assets to your heirs without going through the probate process. A Living Trust is completely revocable and amendable during your lifetime and serves as your inheritance plan. Even with a Living Trust you will want a Pour-over will that transfers any assets not already owned by your Living Trust into the Trust and appoint a Guardian for your minor children. A Living Trust requires little or no maintenance during your lifetime and does not trigger any additional fees or taxes. You should visit a qualified estate planning attorney to draft your estate plan.
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