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May 10, 2014

Using Joint Tenancy with Real Property as a Probate Avoidance Device, Part 2

Although, joint tenancy will avoid probate, holding property as joint tenants may also have adverse and unexpected consequences. First, a little primer on basis to understand what is meant when we speak about your basis in property.

Generally, your basis in property is what you paid for it when you acquired the property. For purposes of this discussion and to keep things simple, we will not address the adjusted basis which is determined when you consider gain or loss such as capital improvements or depreciation, respectively, to the property.

If you paid $100,000.00 for real property, your basis in that property would be $100,000.00. If you later sold it for $250,000.00, you would realize a gain of $150,000 that, ignoring any exclusions or exemptions that may be available, would be subject to taxation. Similarly, If someone gifted you that same property during their lifetime, your basis in the property would be the same as the person gifting it to you. If they paid $100,000.00 for the property and gave it to you when it's fair market value was $250,000.00, your basis would be $100,000.00 and if you sold it for $250,000.00, you would have a taxable gain of $150,000.00. Again, for demonstration purposes we are not taking into account any state or federal exemptions or exclusions available such as those under IRC section 121.

Let's say someone paid $100,000.00 for real property and when they died, the fair market value of the property was $250,000.00. Further, let's say that person named you as the beneficiary of that property in their Will, Trust or you received it by intestate succession. Your basis in the property would be the fair market value at the time of the decedent's death. In other words, you would benefit from a "step up" in basis to $250,000.00. This means if you turned around and sold the property for $250,000.00 there would be no gain that you would be responsible to pay tax on.

In short, if you inherit property from a decedent, your basis would be the fair market value of the property at the time of the decedent's death.

If you hold property with another person as joint tenants, only 1/2 of the property, the decedent's 1/2, gets a step up in basis at the death of one of the two joint tenants unless the surviving joint tenant can prove the decedent contributed most, if not all of the purchase price.

This is of particular importance if you are married. If you and your spouse have your property in a trust which describes the character of the property as community, or if your vesting document states the property is held as husband and wife as community property, the entire property gets a step up in basis at the death of the first spouse, not just the decedent's one-half. Conversely, if you and your spouse instead own the property as joint tenants, only 1/2 of the property gets stepped up, regardless of who contributed to the property. Further, the surviving spouse's basis in the remaining property is 1/2 of the original purchase price. This is easily avoided and makes me wonder why married couples hold title to real estate as joint tenants unless it is for the purpose of having only 1/2 of the property included in the decedent's gross estate for federal estate tax purposes.

Another item that could become problematic is when you own property and want to add someone to your property as a joint tenant. There are things you may want to consider before doing so. For example, the addition may be deemed a gift to that person which may be subject to gift taxation. Secondly, even though you can add a joint tenant to your property without requiring that person's signature or approval, you cannot remove the joint tenant from the title without the their signature. If the added joint tenant doesn't want to be removed from title and doesn't want to live with or own property with you, they could possibly bring an action in court wherein the court could order the property actually divided into equal parts for each of you (you and the added joint tenant) or order the property sold and distribute the proceeds equally to each of you.

Third, you may want to consider a potential joint tenant's financial situation prior to adding them to the title as a joint tenant. If the added joint tenant has creditor issues and a creditor successfully brings an action against that person and obtains a judgement, the creditor can file a lien that would attach against the entire property.

Subject to certain 'original transferor' and 'change in ownership' rules promulgated by the Board of Equalization, there are potential property reassessment tax issues to be consider before adding or removing a joint tenant.


February 16, 2012

Problems With Drafting Your Own Will

A Will, a Trust, Powers of Attorney, Advance Health Care Directives, HIPAA Authorizations, Personal Property Assignments and any thing else attendant to your estate plan are legal documents. We don't advocate drafting your own estate planning documents, but if you do, make sure your intent is clear. The smallest mistake can completely disrupt your plans, goals and desires with respect to your estate assets.

For example, a man, Duke, who passed away in 2007 had handwritten (holographic) his own Will in 1984 which purportedly provided that his $5 million estate was to be distributed to his wife and then 1/2 to the City of Hope and the remaining 1/2 to the Jewish National Fund. The Will disinherited anyone not mentioned in the document. Duke had two surviving heirs, his nephews, Robert and Seymour Radin who were estranged from Duke.

The language in the Will specifically provided that if Duke and his wife died "at the same moment", then the estate was to be equally divided to the above named charities. Duke's wife died in 2002.

Duke's Will was admitted to probate and the Radins filed a Petition for Determination of Entitlement to Estate Distributions. Their argument was that the charities would only receive the inheritance if Duke and his wife died "at the same moment" as stated in the Will. Further, there wasn't a provision in the Will that provided for disposition of Duke's estate after his death.

Los Angeles Superior Court Judge Mitchell L. Beckloff found for the Radins by ruling that the Will was not ambiguous in that Duke and his wife did not die at the same moment, nor did Duke's Will offer any disposition of his property if he survived his wife. The result was that Duke's estate was to be distributed as if there were no Will at all, through the laws of intestate succession, specifically, to his 2 surviving heirs.

The charities appealed but the Court of Appeal affirmed and ruled in favor of Radins.

You can read more about this case in an article by Sherrie M. Okamoto in the Metropolitan News.

May 30, 2011

Who Will Get Your Property?

People usually do not grasp the unintended consequences of who their property will be distributed to upon their death without an estate plan of some sort.

I had a client who had dated a man for 30 years before finally giving in to his multiple proposals. Unfortunately, the man passed away within the year of their marriage. The man had an estranged daughter from a previous relationship and had not had contact with her for decades. The man owned multiple assets, including the home he lived in with my client, but because the couple was recently married, all the property was the decedent's separate property and my client did not have a community property interest in any his assets.

The man did not have an estate plan. Under the laws of intestate succession, all of his property would pass to his wife and his estranged daughter equally. Additionally, a probate would be necessary to effectuate the transfer of the assets which included multiple bank accounts and real properties to the wife and estranged daughter.

You can imagine my client's surprise and chagrin when I explained that not only would her husband's estate be subject to probate, but that his estranged daughter would need to be noticed and she would be entitled to 50% of all the assets, including the home my client had resided in with this man.

On another occasion, I met with a successful single man who was interested in estate planning. He asked me where his assets would go if he passed away without directing distribution of his property by a Will or Trust. He didn't have children and both his mother and father were living. I explained that under the succession laws of CA, his property would go to his parents in equal shares, subject to a probate proceeding.

He was mortified. It turned out that his parents were divorced and he did not have a relationship with his father in any respect whatsoever. And he explained, he would not want anything he owned passing to his father under any circumstances.

May 2, 2011

Who Would Receive Your Property if Your Testamentary Transfer is to a Disqualified Transferee Under California's Care Custodian Statute?: Part IV

In August 2010, SB 105 was passed by the legislature. There is a new Probate Code Section (21362) updating the previous definition of "care custodian." This Section addresses gifts that become irrevocable after January 1, 2011.

This Code states that a care custodian will no longer include "a person who provided services without remuneration if the person had a personal relationship with the dependent adult (1) at least 90 days before providing those services, (2) at least 6 months before the dependent adult's death, and (3) before the dependent adult was admitted to hospice care, if the dependent adult was admitted to hospice care."

And if all this is too confusing, or you are not certain if a gift will be disqualified under the statute, an independent attorney can provide a Certificate of Independent Review.

A Certificate of Independent Review mandates an attorney that is, well, obviously independent from the situation to counsel the client regarding the "nature and consequences of the intended transfer." Under California Probate Code 21370, the independent attorney is described as an attorney who "has no legal, business, financial, professional, or personal relationship with the beneficiary of a donative transfer at issue under this part, and who would not be appointed as a fiduciary or receive any pecuniary benefit as a result of the operation of the instrument containing the donative transfer at issue under this part."