Los Angeles Estate Planning Attorney | Law Office of Philip J. Hoskins | Basic Legal Principles

Following are some basic legal principles for your review and background information. While some of this information may have no application to you now, please at least skim through to see if any topic grabs your attention.  I  urge you to keep this Guide in your library for handy reference in the future, when you may need some of the information that does not apply today.

Sole Ownership

When title to property is in one person’s name, the law regards that person as the sole owner.  Any other person claiming rights to that property has a steep uphill battle to establish such a claim. 

The named owner has the exclusive rights to sell or transfer the property.  Upon the death of the named owner, it will pass to the people named in the owner’s Will or, in the absence of a Will, to the owner’s heirs.  Any tax deductions related to the property will be limited to the named owner.

Where the two of you pool your income and purchase an item with money from that common fund, you should make certain that any document relating to the item of property reflects your dual ownership.  It is unwise to depend upon private assurances between the two of you that are different from the written statements of ownership. Don’t rely on verbal statements or your “understanding” or assumptions.

Joint Ownership (Joint Tenancy)

When you own items of property jointly, it is called a joint tenancy.  This is a unique form of ownership and can be a useful tool of financial planning, but must be approached with caution. 

A sample phrase that is used in joint tenancy situations is:

Terrry Brown and Christopher Hodges, as joint tenants with right of survival."

Rights of Joint tenants

Each joint tenant enjoys complete and full rights of ownership.  Either can sell the entire property without the permission of the other (although you will find few buyers willing to take the risk), even though you would both be entitled to share equally in the proceeds of the sale. 

You own what is known as an “undivided joint interest” which gives you extensive rights to occupancy and decision-making regarding the property.  Either one of you could occupy the property to the exclusion of the other. 

You cannot pass your joint ownership interest by Will.  Since this is even more extensive than the rights married couples have in their community property, joint tenancy is to be entered into only after considering all its ramifications.

Obligations of Joint Tenants

Each joint tenant is fully liable for any debts secured by or connected to jointly owned property, whether he or she had anything to do with the creation of the liability or not.  Each joint tenant is responsible for the maintenance of the item of property, whether the other one contributes or not.  As far as the law is concerned, joint tenants are considered to be one person and completely interchangeable for most purposes regarding liability to the outside world.

Inheritance for Joint Owners

On the death of one joint tenant, her or his interest immediately ceases to exist.  Therefore, the surviving joint tenant is the only owner.  That means that one joint tenant cannot will his or her interest to someone.  There is nothing to pass by Will.

This is one of the major features of joint tenancy from an estate planning perspective.  Since title to the interest of the deceased joint owner passes by law to the surviving joint owner, there is no need to put the property through probate.  This will save you probate fees and possibly attorneys' fees as well.

Upon the death of one joint tenant in real property, the survivor merely needs to file a declaration and record it to transfer title in most states.  If you have a joint bank account, the survivor is entitled to immediate and uninterrupted use of the account, although banks will require you to complete a form when one joint tenant dies.

Taxes With Joint Ownership

Upon the sale of jointly owned property, each of you will be responsible for income taxes on any resulting net income.  Each of you is fully obligated for any property taxes connected with the property.  If you are subject to inheritance taxes (if the gross value of your estate is in excess of the exclusion amount), you should seek the advice of a tax professional regarding the taxation of jointly owned property.

Upon the death of a joint tenant, the IRS may assume that the entire value of the jointly owned property should be included in the taxable estate of the decedent. This assumption can be rebutted by showing that the survivor paid for part or all of the property.

Other Special Issues with joint ownership

One of the features of joint ownership is that either joint owner can end it.  A joint owner can convert title to the property to tenancy in common by recording a deed transferring title from oneself as a joint tenant to oneself as a tenant in common under the law in California and some other states.  You should seek legal advice in this regard if the need arises.

The advantage of this is that if the two of you wish to end your relationship but retain ownership in the property, either of you can protect your rights by recording a deed.  Each of you would then be equal co-tenants and could, for practical purposes, control the sale of the property as well as limit your liability with respect to the property.

cOMMUNITY PROPERTY

There is an important variation on joint ownership that is available to registered Domestic partners and married couples in California. This is taking title as community property with right of survivorship.

If property is purchased with community funds it is best to take title, or transfer title to yourselves as community property with right of survivorship. The benefit of this form is that upon death on the first to die, the entire property will receive a step up in basis for tax purposes. To illustrate, consider the following example:

·         Property was purchased in 1990 for $500,000

·         For tax purposes, this is known as the “basis”

·         Value of property on the date of death of first of you is $800,000.

·         Property is sold after the death of the first of you this year.

·         The tax on the sale of the property is the “gain”, or difference between the basis and the sale price

Tax treatment of sale AT A LATER DATE

IF Joint tenancy

·         Basis - $500,000

·         Value on date of death - $800,000

·         Sale = $800,000

·         Increase in basis on the deceased’s portion would be one-half the value on his or her death or $400,000

·         Survivor’s basis for the whole property is then $250,000 for their original share plus $400,000 for the share of the deceased owner = $675,000Taxable Gain is $125,000 to survivor

IF commUNITY PROPERTY WITH RIGHT OF SURVIVORSHIP

·         Basis - $500,000

·         Basis step up to $800,000 on date of death

·         Sale = $800,000

·         Gain is for the survivor is $0 – no gain at all.

I suggest you consult a tax expert with any issues or questions regarding your particular circumstances.

Tenants in Common

If the two of you are unmarried or not Domestic Partners, and want to establish shared property rights, tenancy in common is probably your best bet.  When you own property as tenants in common, you can establish your respective rights as either equal or unequal.  For example, if one of you earns twice as much as the other, you may want to reflect this fact in how you own your assets. 

You can place title to real or personal property items in both names to result in equal ownership rights as follows:

“John Jones and Bruce Williams as tenants in common”

Or, you can specify ownership shares, as follows:

“John Jones as to an undivided ¾ interest and Bruce Williams as to an undivided ¼ interest, as tenants in common”

Such flexibility is often important as a way of expressing your financial relationship.  Marriage laws of states such as California, by contrast, automatically provide for equal ownership between spouses.

Rights of tenants in common

Each owner can dispose of his or her ownership interest in the property by Will. 

Each owner of a tenancy in common has the right to occupy and use the item of property.  This right does not permit the exclusion of the other tenant in common, however.  Neither owner can force the other to sell the property except through a court order.  However, either owner can sell his or her rights in the property without the approval of the other.

Absent a Will, an owner's interest will pass by law to their heirs under the law, which usually does not include the co-owner (a good reason why you will want to complete your own Will and/or Living Trust).

Obligations of tenants in common

Each tenant in common is responsible for liabilities connected with the property to the extent of their ownership interest.  For example, where you buy a house or condo and take title as tenants in common, a ¾ interest to one and a ¼ interest to the other, claims against you, as owner of the property will reflect the same ratio.  Of course, if you sign for a debt related to the property, whatever terms are specified in that document prevail.

For practical purposes, however, remember that if one of you defaults on a secured debt, the other is going to have to find a way to pay both shares if she or he wants to maintain ownership of the property that secures the debt.   As a result of paying more than your share, there may be rights of repayment between you, but as far as your lender is concerned, they just want the payments.

Should there be a loss connected with the item of property, such as an injury for which the property owners are liable, both of you will be liable for the loss to the same extent that you hold ownership rights. 

Personal liability is different, as, for example, where you drive a car owned by both of you—you are personally liable for the full amount of damages caused by your accidents.  Both of you also may have liability in that case as owners of the car, to the extent of your ownership interest. 

Inheritance by Co-Tenants

As indicated above, one tenant in common has no rights of inheritance in the interest of the other tenant in common (co-tenant).  Where you own an item of property as co-tenants and you want your interest to go to your partner upon your death, you will need to take care of that in your Will or Living Trust.

Taxes Among Co-Tenants

Any income earned in connection with property owned by co-tenants, such as on the sale of the property, will be subject to income tax in proportion to the respective ownership interests.  Income generated as a result of personal effort, however, will be taxed entirely to the person expending the effort.  If you are in doubt about any of this or wonder how it might apply to you, your best bet is to see a tax or legal professional.

Property taxes are apportioned in the same ratio as the ownership interest, although once again, both will want to make sure the full taxes are paid to protect your interest.

Joint tenancy vs. Tenancy in common

Joint tenancy

·         Immediate transfer upon death

·         IRS presumes survivor paid for it all. To disprove this you would need documentation.

·         There is “basis” increase on deceased’s portion only to extent he or she paid for the property

·         If couple owns jointly and separates, property may pass to wrong person

Tenancy in common

·         Each owns their share

·         Each can give their share on death as they desire

·         Tax basis increase on death for portion owned by deceased owner

·         If couple separates, each has legal right to pass their share to who they wish