Latest / The Jon Sanchez Show / Why California Homeowners Should Think Twice About Joint Tenancy
Transcript
- Jon G. Sanchez: Good Wednesday afternoon to you. Welcome to the John Sanchez show on Newstock 780 KOH. Pleasure to be with you. I hope you've had a great hump day, as we like to call it. Two more days to the weekend. And hey, don't forget, of course, three day weekend for many people. So yeah, we're seeing it. We're feeling it. It's right around the corner. Hang in there. All right. Thank you so much for joining me. As I said, got a great show lined up for you today. It's Wednesday. That means I get to cover an a a estate planning topic with you. Something I obviously love talking about. The markets and estate planning. That is Love it, love it, love it. Here's what we're gonna be talking about. You know, for decades, for decades, Joint tenancy with rights of survivorship has been the absolute default way that many people Hold title to their home. And if you don't know what that is, that means of course, you and another person doesn't have to be a spouse, but you and another person or persons have equal right to that home. Pretty simple. From an estate planning standpoint, what's nice about joint tenants' rights of survivorship is it avoids probate, right? So when one person dies, let's say it's a husband and wife, let's say the husband passes away, then of course the wife takes over the house and she owns one hundred percent of it. But the problem comes into play when she passes away. I'm gonna pick on our listeners that are in California for today's show. And the reason being is because of two things. We've had our nice share of a pri price appreciation here in the in Northern Nevada. But California, especially out of the Bay Area and nearby, obviously significant price appreciation. But the other reason I'm gonna pick on California residents today, and I say that in a good sense, is because the state of California not only has an income tax that we don't have. But they also have a state capital gains tax, dependent upon your income level. Well, here's where the problem of joint tenants with the rights of survivorship come into play. It comes in play in regards to the capital gains. But there are two other ways that you can hold title for your California properties. And I'm talking, I'm not talking investment, I'm talking your primary residence. There's two other ways that you can hold title to dramatically reduce the capital gains tax that you would pay. selling your home, if you hold title, and the two ways that I'm gonna share with you today. It's interesting. What I'm going to share with you could literally save you thousands or sometimes hundreds of thousands of dollars. And it really is simple as owning the property in the right titling. And if you guess one of those is a living trust, you're absolutely right. But the second method. you may have never even heard of about before. So for all of you California listeners, Truckee and north of Reno, et cetera, this show is designed for you. But for those of you here in northern Nevada, listen closely because you may have friends, relatives, et cetera, that own property in California or, you know, frankly, other states that have a capital gains tax. And you can share this information, you can share the podcast with them, YouTube, et cetera. So I've titled today's show Why California Homeowners Should Think Twice About Joint Tenancy. Why they should think twice about it. It's gonna be fascinating. I didn't I didn't do a really good job, I don't think, explaining that to you, but you get the point. There's better ways to hold title than joint tenants' rights of survivorship if you are tax sensitive, which I think every person is. So, with that said, I will get to that momentarily. But first, let's get to the stock market side of things today. Hey, not a bad day today. Nice little comeback from the the sell off of yesterday. We didn't recover all the losses of yesterday, at least on the you know, the Dow side of things. actually the Dow or the NASDAQ or the SP. But we put a little bit of a dent in there. So if we go back to this morning, things were looking pretty good in the pre-market session. And believe it or not, what gave us a nice little boost in the pre-market session occurred right at about 515. And the reason being 515 was so important is because at 515 we had the release of the ADP private sector jobs report. Okay. Folks, we're in one of these periods where we don't want good economic news. Because as I keep stressing over and over again, investors are concerned about inflation and of course rising bond yields, right? What's the Fed gonna do as far as the interest rates are concerned, in regards to the Fed funds rate, so on and so forth. You don't want strong economic data. Again, the odds are still over well sixty percent last time I checked in regards to a quarter percent in entry increase coming up in the at the next Fed meeting. in in September and then again another probability, yeah, right around twenty-five, thirty percent for December, as we shared on the show yesterday. So we're in one of these positions where, yeah, we want a strong economy, no doubt about that. But at the same time, we got to be Goldilocks. We don't want the economic data to show too strong of an economy or the Fed's going to come into play and and raise interest rates. We don't want too weak or the stock market does not like that and things start to sell off. So we need that Goldilocks number. And we receive that today. This ADP private sector jobs report. This is when we really started to pick up momentum in the pre-market session. So ADP, which again they're getting better. I used to be a big critic of ADP because their number they were so far off. Because remember, we will get the the government's non-farm payroll numbers on Friday, of which they covered the private sector, which is what ADP does. And up until recently, I'll give it to ADP. Up until recently, they've been pretty inaccurate, but recently things have gotten pretty good, meaning. Their numbers are starting to get a little bit closer to the government. So give them full credit for that. So ADP said today that for the month of August, the private sector job growth was 38,000. Estimates were only 47,000, but you know, 10,000 missed there. July's reading was 46,000. So, you know, a little bit of a come down from the previous month. But the street liked that. Why? Again, not a very strong jobs report. Once again, another Another feather in the camp that doesn't want the feds to raise interest rates. And again, we will see this Friday when we get the non-form payroll numbers. I'll of course go through great details on this on the show on Friday of what the numbers actually are. So that kind of set the catalyst for a day where it's like, okay, things aren't all that bad. oil prices were relatively tame for most of the session until we kind of got towards the close and then we started to see oil tick up a little bit, finished up about 68 cents a barrel. So it was nothing major. But we did break above the $90 mark. finished at ninety dollars and ninety six cents. So yeah, that was after yesterday's four dollar plus run on oil to the upside. So the market kind of used today, I think, to to somewhat digest really what what is going on. You know, it's it's been a tough couple days here. It really has been. And so we needed a bit of relief. you know of course the situation continuing in with Iran and and but you know it's amazing again you can have the same news Meaning we awoke to news that a couple ships have been hit in the Strait of Hormuz. Oil prices didn't really react to it. Other days you say the same type of thing, and oil prices react to it. So it's really bizarre to try to figure out when oil prices, the commodity traders, are going to react to to any any news that's that's going on between the two countries. But today, like I said, didn't really worry about it too much at all. So, so again, we finished up sixty eight cents at ninety ninety six a barrel. 10 of the 11 sectors finished higher today, so the gains were broad based. we had some pretty good movements in names Steel Dynamics had a $13.55 gain up about 5.79% to $247.64, amid some focus on US Canada trade negotiations. other metal names also outperformed in the same same for the same reasons. let's see, charter communication had a heck of a day today, up $12.78, 8.74% gain to $158.97. Reddit was a strong performer, nine and 9.31% rise, up $13.47 to $158.11. Nvidia, nice day today. 3.2% gain, up $6.96 to $224.40. let's see, Dell was another catalyst in the pre-market, started in the after hours when the company released the earnings numbers and just continued forward. You know, again, just amazing what this company, what their stock performance has been doing. Up 15.76% today, $67 gain to $492. Remember, of course, Dell was publicly traded forever. Then they went private and then they brought it back a couple of years ago. But yeah, what a incredible performance of the stock today. Company delivered a really sizable earnings beat on both the top line and the bottom line. They raised their fiscal twenty seven AI optimized excuse raised their fiscal twenty seven earnings due to AI optimized server revenue outlook, to be between about seventy four billion dollars from previous predictions of sixty billion. So Yeah, what's another 14 billion on the upside? My goodness. Hewler Packard Enterprises kind of followed right along, up 1.94%, $51.86 close there. you know, you get the picture. I can go right on through the list. Overall, like I said, a pr a pretty decent day. Here's how we finished up. The Dow rose 295 points.56% to a close of 53,061. The Nasdaq gained 118 points.45% to finish the day at 26,217. And the SP up 35 points or 0.46% to finish at 7,666. All right, when I come back, I'll hit the commodity side, interest rates, of course, and then we're going to get into our topic: why California homeowners should think twice about owning property as joint tenants. Back the John Sanchez show on News Talk 780K, which I'll get to my topic here in a moment. My estate planning topic for this Wednesday: why California homeowners should think twice about owning property and joint tenants. But first, let's give you that recap once again on the stock market side of things. We finished up 295 on the Dow 0.56%. NASDAQ rose 118 and the SP gained 35. As I said, oil up 68 cents, 90.96 a barrel. Gold $18.10 rise for the day to close at $4,416.60. And here was the other factor that helped the stock market out today. We finished with a big goose egg unchanged on the 10-year treasury yield at 4.8%. All right. You're now up to date on the market. Let's now get you up to date on owning real estate and the proper titling. But first, before I do, I want to give you a reminder. You know, every other Wednesday I hold an educational estate planning webinar. They're free, purely about education. My next webinar is going to be on next Wednesday, September the 9th, of course, at 6 p.m. And we've titled it. Business owners, protect your family and your business. You know, as a business owner, I can tell you this firsthand, and I know all you business owners can agree with me. You've spent years building your business. You made payroll through the hard months. Maybe you didn't take a penny, but you had to make sure the employees got paid. You've taken the risk. You've turned an idea into something real. But here's a question most business owners never stop to ask. What happens to that business if something happens to you? You see, for most business owners, the company is one of their largest assets and one of their least protected assets. The estate plan built around it is often an afterthought, if it exists at all. And without the right structure in place, the business you work so hard, the blood, sweat, and tears to build, can become the very thing that puts your family at risk. So in this webinar, we're going to show you how to fit the pieces together. Trusts, LLCs, powers of attorney, and a real succession plan that aren't just separate boxes that you check. They work as a system, one that protects your family and everything that you have built at the same time. So again, join me on September the 9th, 6 p.m. and walk away knowing your business is set up to outlast any surprises. Just go to my website, specializetrusts.com, and sign up for it. It's really that simple. All right. As I said at the beginning of the show, for decades, many people, and again, I'm gonna pick on California. Love California, love Californians, but Again, very unique state from the rapid appreciation of the real estate. And of course, a state that has very high capital gains tax when you go to sell real estate. Now you may be thinking to yourself, wait a minute here, John. I can sell my house, make a half a million dollar profit, and if I'm married, and not pay a dime of state or federal income tax. Well, maybe, maybe not. But it's not that hard if you've owned real estate for 20 plus years, if not less. In California, because of the rapid appreciation, to exceed that half a million dollars. So what have people done? Right? You go to an escrow company or talk to your realtor, nine times out of ten, they're going to recommend hey, just own your property, your primary home. Again, that's what I'm going to focus on. Just own your primary home, joint tenants with rights of survivorship. Right? It's kind of the default way that many people hold title to their home. It's simple, it avoids probate, as I said, because when the first spouse dies, it requires no special planning. But, you know, like anything in life, simple and smart. Sometimes don't go in the same sentence. And in California, again, where property values have soared and capital gains taxes are among the highest in the nation, that default choice can quietly cost their surviving spouse tens or even hundreds of thousands of dollars. So if you're a California resident, listen closely to what I'm about to tell you. I'm gonna title this first section The Hidden Tax Trap in Joint Tenancy. So I'm going to get a little heavy with you here. So follow me real closely if you can, because this is really the the the crux of it, and then I'll lighten up on you a little bit. So when a married couple owns appreciated property, and once again, I'm going to emphasize: I'm just talking primary residence. I'm not talking investment property. So when a married couple owns appreciated property as joint tenants with rights of survivorship, what we call JTWROS, the surviving spouse gets only one half. Of the stepped up cost basis when the first spouse dies. The deceased spouse's 50% interest is revalued at fair market value as of the date of death. But the surviving spouse's half retains its original cost basis. So let me give you example. Let's say a couple bought a home years ago, let's say 1995, let's say they paid 300,000. Today it's worth two million dollars. Here's what happens if they hold title, joint tenants, and one spouse dies. The deceased spouse half steps up from 150,000. Now, where did I get that number? Again, they paid 300,000 for the house. Split that by two, it's 150,000 cost basis for the husband and the wife. Let's say the husband dies. So his half, his 150,000. Steps up from 150,000 to a million dollar cost basis. Now, why a million? Again, they sell the the today the house is worth two million, because remember, you have to get an up a an appraisal done after death, right? You have to establish a new cost basis. So two million divided by two people, that's a million. So again, we take the purchase price, divide it by two, that's where we come up with 150,000. We take the appraised value of two million divided by two. That's the million for each person. Okay. So once again, the deceased spouse half steps up from The 150,000 cost basis to a million. Now stepped up, of course, we hear we talk a lot about that in investment real estate, right? As I've always said, this is how the wealthy make tons of money in real estate. They buy and then they 1031 into the next investment property. Then they do another 1031, another 1031. And what may have started as a $200,000 original real estate purchase now could be worth millions of dollars. They die. Their beneficiaries now get the stepped up basis, meaning the value of that rental property or portfolio at the time of death wipes out all the previous what would have been capital gains tax that has been deferred through the 1031 process. Same thing happens in a home, right? Your primary. But again, we don't talk a lot about it because most people sell their home and you know, you make under half a million, everything's good. But again, as real estate continues to appreciate, this is becoming much more of a fact. Okay, so once again, the deceased spouse half. Steps up from the 150,000 cost basis to a million. Cool. Okay, just like rental real estate. The problem lies with the surviving spouse. The surviving spouse's half remains at its original $150,000 cost basis. So combined, the new basis of the property is $1,150,000. Okay, that's the new cost basis. So if the surviving spouse later sells for, say, two million dollars, roughly an eight hundred fifty thousand dollars gain, is potentially taxable less than two hundred and fifty thousand single file filer exclusion. If you look at California's combined state and federal capital gains rate, which can exceed 33% for high income earners, that's a tax bill worth north of $190,000. All of which is avoidable. And I'll tell you how when I return. Welcome back to the John Sanchez show on News Talk 780 KOH. Get back to my topic here in just a quick moment, why California homeowners should think twice about owning their property in joint tenants. Quick recap of the market. Once again, we finished up 295 on the Dow. Nasdaq rose 118 and the SP higher by 35. Oil 68 cent gain there. All right. Now back to my scenario. I want to go over this one more time with you. So this is what many people have no idea exists. So you bought a house in California years ago, and again, I'm just focusing on primary residence. Again, the example I'm giving, say you bought your house and yeah, it doesn't matter the year, nineteen ninety five. You pay three hundred thousand. You're married. Okay. But today that three hundred thousand dollar property is worth two million dollars. The husband dies. So remember, the cost basis is $150,000 for the husband, $150,000 for the wife, right? So the husband dies first. His $150,000 cost basis jumps up to the current value of the property, which is $2 million. Well, he gets half of that. So his cost basis is a million. So no taxes due because he gets a stepped-up basis. The surviving spouse, this is where the problem comes in. Her half remains at its original $150,000 basis. Well, again, she's single now. She's not getting a half a million dollar tax-free. She only gets $250,000 tax free, assuming she's been there two out of the last five years. So the combined new basis, his $1 million, her $150,000, new basis, $1,150,000. But if she decides to sell that house later, let's say again for $2 million, roughly $850,000 in gain is potentially taxable. Less her 250,000 single file or exclusion. At California's combined state and federal capital gains rate, which it can exceed 33% for high earners, that's a tax bill worth north of 190,000. Now, here's a little gotcha that many people are not aware of. The capital gains rate in California. So unlike federal capital gains, where if you own the investment, house, stocks, whatever it is, if you own it, Longer than 12 months, 12 months or longer, you get the long-term capital gains rate starting at roughly 20% for most income earners. There's some lower brackets, but on average, it's about 20%. But if you own it less than that, it's tax at your income tax bracket. Well, with California's capital gains tax rate, California does not offer lower rates for the long-term investments. Holding an asset for a day, 10 years, 20 years, it's the same tax rate. And again, for those making over a million dollars a year in California, the maximum state rate is 13.3%. So you take that with a top federal rate of 37%, and you could easily get up to you know forty, fifty thousand excuse me, forty or fifty percent that you could lose and profit. It's amazing. It's absolutely amazing. But again, I've got a solution for you, so hang tight. So here's the first solution. California created what's called the community property with rights of survivorship titling, specifically to fix the problem that I just laid out for you. Let me share that you had that again. Not joint tenants or rights of survivorship, community property with rights of survivorship. So when a married couple holds qualifying community property this way, community property with rights of survivorship, the entire property, both his half and her half, receive a full stepped-up cost basis. At the first spouse death. So, just as the scenario I just laid out to you, the surviving spouse's new basis is $2 million. Sell for $2 million, owe nothing in capital gains tax. All because you had the titling community property with rights of survivorship, not joint tenants with rights of survivorship. Now, before you drive off the road or fall out of your office chair, do me a favor. Before if you own California property, and again I'm talking primary residents here. If you own California property, please consult your attorney and tax professionals and so on and so forth before you run out and do this. Okay? Cause I'm making it really simple. Like anything, there's a lot of caveats. But I bet many of you did not know there's such a thing as community property with rights of survivorship. However, so now I just settled the tax problem for you. But it still leaves the property exposed to the second problem, and that is probate on the second person's death. Because remember, probate offers no privacy. It's an open forum. Anybody in their uncle can come and sit in the courtroom and listen and challenge the estate and so on and so forth. So there's no privacy. Provides no framework for incapacity. Provides no framework for blended families or stage distribution to your children. So you know where I'm going with this. Now we talk about the advantages of a living trust. Because for most California couples with appreciated real estate, transferring the home into a properly drafted revocable trust accomplishes everything I just went over with you for the community property with rights of survivorship, but considerably more. Pardon me. First benefit, you receive, just like the community property with rights of survivorship, the double stepped up cost basis. So when community property is held in a joint revocable trust with the appropriate community property language, both the husband and the wife receive the stepped up basis at the first spouse death, just like community property with rights of survivorship. So look at that. We got the same thing by having our property in a trust. But what the community property and joint joint tenants does not do, it doesn't avoid probate, as I said. So joint tenants and community property of the rights of survivorship only avoids probate at the first death. But when the surviving spouse passes, the property heads to probate unless further planning is done. Again, a trust is gonna avoid probate on both deaths, a absolute huge savings in California. Where by the way, probate fees are statutorily set and can easily run 4 to 5% of the gross estate value. Let me repeat that. Probate fees are statutorily set between 4% to 5% of the gross estate value. Now I want to pause and explain the gross estate value because a lot of people have no idea. Gross estate value is really simple. Add everything up that you own, that's the value of your estate. But what a lot of people forget, life insurance gets counted in that. Yes, life insurance gets counted in that. So four to five percent, you know, million-dollar estate, significant, right? It's and then of course the value of your home, so on and so forth. But again, if you have a living trust, that's avoided. Another thing that the joint tenancy with community property rights of survivorship doesn't do for you. It doesn't provide any incapacity protection. So if a spouse becomes incapacitated. A successor trustee can manage and even sell the property without court conservatorship. Joint tenancy, can't do that. So again, wife pass or husband passes away, wife is the survivor. She becomes incapacitated, gets Alzheimer's, a million things can happen. No one can manage her financial affairs, including selling the house. But of course, if you have a living trust, you have a successor trustee. That is the person, what I call the big dog, that will be able to handle that for you. As I mentioned briefly earlier, privacy. Huge issue for people. Probate as public. A trust administration is private. Control over the distribution. Trust can protect assets for minor children, provide for beneficiaries with special needs, shield inheritances from divorcing spouses, and structure distributions over time, none of which joint tenancy or survivorship deeds can do. And for those with blended families, we have flexibility now. Joint tenancy automatically gives everything to their surviving co-owner, which is why it avoids probate, which can unilaterally or unintentionally disinherit children from a prior marriage. Trust lets each spouse direct their share where they actually want their money to go. And this is a very, very, I want to pause on this, this is a very, very common problem. Okay. It's your second marriage. Let's say he comes to the marriage with two kids, she comes to the marriage with two kids. Okay. He passes away first. Well, of course, he wants his fifty percent of the estate to go to his kids. In most cases, I've yet to see it where he wants it to go to his two kids and her two kids, especially if it's a new marriage. Usually it's all about him, his kids, and she is concerned about her kids. Again, there are exceptions, but I'm just telling you from my experience. Well, once again, without w without the the property being in the living trust, if it's only under joint tenancy, guess what? She owns 100% of the house. 100%. And no one legally can stop her from doing whatever she wants with the proceeds of that house if she decides to sell it. She can give every dime she has of the entire estate, not just the real estate, to her children and leave your kids, the husband's kids, out in the cold. Something you wouldn't want. Living trust, you can say exactly where you want your 50% to go. Now when I come back I wanna talk about I'm gonna call it the funding gap. How about that? I'll leave it with that. I'll share with you what I mean when I free turn. Welcome back to the John Sanchez show on News Talk 780 KO H. All right, once again, got my next webinar coming up: Business Owners Protect Your Family and Your Business. Next Wednesday, September the 9th at 6 p.m. Just go to my website, specializedrust.com and sign up for it. All right, so this last segment I'm titling The Funding Gap. Now, here's what frustrates everybody. You spend the time, you spend the money for a false sense of security by getting an estate plan created. You walk out, everything's signed, notarized. But then something happens. No one follows up with you to make sure that your estate becomes funded. An unfunded trust controls nothing. Now remember, if you're not familiar with the word funded, that means moving various assets, specific assets, from your name or yours and your spouse's name into the name of the trust. Most common, of course, are your home, bank accounts, taxable brokerage accounts, et cetera. We don't fund Retirement accounts like IRAs, 401ks, 403Bs, life insurance, and annuities. Because those have beneficiaries on there. They don't have to be funded. You spend all this time and this money, and you have this great sense of peace and secure. It's like, yes, we did it. We finally got our estate plan done. And then you didn't move the house over. That's why in our estate planning process, we make sure that everything you have that's supposed to be funded gets funded. We do what we can. We handle the title work, we handle the homestead exemption, we handle it all for our price. But we make sure we follow the client until they tell us every one of their items that we tell them. that needs to be funded is completed. We equip we don't stop bugging them until it's all done. So, what ends up happening? They spend all this time, this money, as I said, the house isn't in the trust. So, guess what? Both people die, the house goes to probate. Now, as you know, deed titling and transferring is a very, very complicated process. The trust must have the right vesting language, executed with the right formalities, and recorded in the correct county. Now California adds a little bit additional twist to it. It also means navigating Proposition thirteen, reassessment rules, and the parent child tax exclusion under Prop nineteen, which ensures the transfer structure to avoid triggering a property tax reassessment, right? Going against Prop thirteen. Very detailed sensitive work. So what we have done recently is we have partnered with a national title company that can do title work for us in all fifty states. And by the way, we can write estate plans in every state plus District of Columbia. So really excited about our new new partnership with this title company because again, it we had one the other day with a client that had a bunch of property in Arizona and I looked into the rules and I'm like, nope, way beyond our expertise to handle that. So Hired a company to do that, and we know it's done right and very affordably, et cetera. So you got to be really, really careful if you're trying to do all this yourself to make sure, again, it has all the proper language and the trust, the deed work is done correctly, et cetera. It's very, very critical that it's done right. Otherwise, again, significant penalties, taxes, so on and so forth could ensue. So there you go. There's the California situation. Again, I only picked on California because it's obviously right near us. Many of you live in California that listen to this program. But this same thing applies to various states around the country that have capital gains tax. You know, we're we're so blessed here in California, or excuse me, in California, in Nevada, that we don't have state inheritance taxes. There's about 12 states that actually have state inheritance taxes. Now, for most people, we don't get too concerned about the federal inheritance tax because remember, as a couple, each of you can have $15 million of assets. So combined a state worth $30 million. Before state taxes come into play. But other states, like I said, some states, two, three, four million dollars, estate taxes come into play. And again, it's the gross value of the estate. So you throw in life insurance, real estate, investments, et cetera. And for a lot of people, it's very easy to get to that point. So please, if you have California property, take a look and see how it's titled. You now know a couple ideas of how to do it properly. To avoid probate and most importantly, to do it so that you can minimize the capital gains tax because it can get really, really expensive. Whenever I have this conversation with clients and we do the tax calculation, they're they're they're blown away with what the taxes can be. and then on top of that, if you're talking investment real estate, then you throw in depreciation recapture, which is another 25% tax on depreciation that you've taken. And again, you could easily lose half of 50% of what you thought was going to go into your pocket. So Lot of things to think about with California properties. If I can be of service, please give me a call. The just go to specialized trust dot com, send me an email or give me a call the step office two six zero thirty-eight seventy-five. God bless. Have a great afternoon. We'll see you tomorrow on the John Sanchez show.