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Genealogy has long fascinated many people, and it continues to be studied by those who are interested in discovering who they descended from and what those family members were like. Many of us have gazed at black and white or sepia-tone photos of ancestors whose names we don’t know and wondered about their lives, joys, trials, and accomplishments. Fortunately, today, there are many resources making it much easier to discover information about prior generations of our families.

Celebrate National Genealogy Day this month by delving into the past to find out more about your family members, but also by taking steps to leave behind a legacy for your own present and future family members. By creating an estate plan, you can benefit future generations, not only monetarily, but also by sharing important values and life lessons.

Investigate the Past

Talk to members of the older generation. If you have older relatives still living, take advantage of their knowledge to gain more information not only about their lives, but also about your family tree and the individuals comprising it. You can ask them about how important historical events impacted them and other family members, where they grew up, stories about other family members, the occupations of family members, and other facets of their lives.

Do research. Online services are available that enable you to do research for a fee, but you may also be able to find some information using the libraries of local genealogical societies, genealogical resources in local public libraries, or genealogy databases available at the U.S. Library of Congress. Some companies may even enable you to identify other people to whom you may be related, as well as the cultures and migration paths of your ancestors, by analyzing a sample of your DNA.

Using these tools, you can find out a lot about your family and geographical roots. But you can also get inspired to leave something behind for your own descendants.

Have an Impact on the Future

Leave monetary gifts. Most parents and grandparents want to leave an inheritance for their family members. You can draft a will to transfer the money and property you have worked hard to accumulate to your loved ones, but a simple will alone is often not the best estate planning tool. If you leave outright gifts to your children and grandchildren, there is no guarantee that it will be spent wisely and it can be taken by beneficiaries’ creditors to satisfy claims. In addition, the money and property transferred using a will has to go through probate proceedings, which can be lengthy and expensive, and are open to the public. If you want to ensure that your money and property are available to benefit your family over the long term without the hassle of probate, there are other estate planning tools you can use.

You can make life easier not only for your children but potentially also for your grandchildren by creating a trust, either during your lifetime or that will become effective upon your death, naming them as beneficiaries. When you form and fund a trust, it can hold money and property for the benefit of specific people, and certain types of trusts will protect it from future legal claims arising from lawsuits, creditors’ claims, or divorcing spouses. In addition, you can include terms designed to ensure the funds held in the trust are sustainable by specifying how and when money should be distributed to your beneficiaries. You could decide to have it transferred as a lump sum upon your death, have portions of it distributed when the beneficiaries reach certain ages, or state that it should be distributed for specific purposes, such as expenses for their health, education, support, and welfare. In addition, you can have a positive impact on the lives of your children and grandchildren by setting aside funds to help them with expenditures associated with certain important life events, i.e., a wedding, college tuition, a down payment on a house, or funding for a new business.

Leave gifts reflecting your values.

Not all wealth is in the form of money and property. Over a lifetime, an individual accumulates a wealth of knowledge, life lessons, values, and experiences that can be shared with later generations. Two great ways you can communicate your values, life experiences, and knowledge are creating an ethical will and leaving instructions for your funeral service.

Ethical will. An ethical will, sometimes called a legacy letter, is not a binding legal document. Rather, it is simply a letter—or even a video recording—in which you can communicate any important values, sentiments, or life lessons that you think will benefit your family members and descendants.  Your ethical will can be one of the most meaningful parts of your estate plan, and it can become a part of your family history that will be cherished by future family members who may have no other opportunity to know you or benefit from the wisdom you have gained over a lifetime.

Funeral or memorial service. Although no one enjoys thinking about their own funeral, one of the most thoughtful acts you can do for your loved ones is to make arrangements in advance for your own funeral service. It is also a means to ensure that your service includes elements reflecting values or religious convictions that you want to communicate and pass on to your family members and loved ones. In your arrangements, you can ask the officiate to include scripture verses, songs, or stories that convey principles that you would like your children and grandchildren to heed.

Care for Your Family—Past and Future

This month, you can celebrate National Genealogy Day by spending a little time investigating your family’s roots by researching genealogical records. But an even more important investment of your time can be made by creating an estate plan designed to provide both a monetary and spiritual inheritance that will enhance your family members’ future. Call us today to schedule a meeting so we can help you create an estate plan enabling you to pass on all aspects of your wealth.

NOTE: As always, the information on this website is for general information and entertainment only. Do not rely on this information to take a course of action or refrain from taking action – hire a lawyer.

California Proposition 19, Changes Certain Property Tax Rules. Legislative Constitutional Amendment. (2020)

Summary: The passage of Proposition 19 has generated a number of estate planning issues. For example, the changes could affect pre-existing trusts, such as qualified personal residence trusts, which are typically established with the intent of allowing parents to continue to live in the home while passing ownership on to their children. Once Proposition 19 takes effect, the property will be reassessed unless the children are also using it as their primary residence—and even if they are using it as their primary residence, there is a cap of $1 million on the exclusion. Thus, strategies designed to mitigate unfavorable results should be effectuated without delay. However, the benefits of making a lifetime transfer of the property must be weighed against those of a transfer at death, which would enable the children to have a stepped-up basis in the property. Gift and estate tax considerations may also come into play.

Discussion: Proposition 19, a California ballot measure, modifies Proposition 13 (which limits increases of real property tax to two percent per year unless reassessed due to sale or transfer) and Proposition 58 (which allows property owners to transfer their primary residence to their children at the preferential property tax assessment and up to $1 million of assessed value of other real property, with a later proposition extending the benefit to qualifying grandchildren).

Under Proposition 19, only a primary residence, not other real property, can be transferred to children or qualifying grandchildren at the preferential assessed value. Further, the preferential assessed value is only available if the children or qualifying grandchildren will use the home as their primary residence and to the extent that the fair market value of the residence does not exceed the assessed value by more than $1 million. This part of Proposition 19 takes effect on February 16, 2021 (note that February 15 is President’s Day, when recorder’s offices will be closed).

Some examples provide additional clarity regarding the effect of Proposition 19:

Under current law: Parents seek to give their home and a rental property to their child. The home has a taxable value of $2 million with a property tax bill of $22,000. Today, the home has appreciated, and the value is now $4 million, which means it has increased by $2 million. If the parents gift the home to their child, the taxable value remains $2 million, and the child receives the benefit of continuing to pay only $22,000 on the assessed value (with modest annual increases). The rental property has a taxable value of $500,000, but its FMV is $1 million, with a property tax bill of $5,500. The parents could gift the rental property to their child, and the taxable value of the property would also remain the same at $5,500.

Under Prop 19: Using the same examples, and assuming the child uses the home as the child’s principal residence, only the first $1 million of increased value in the home is exempt. However, the home has increased in value by $2 million, resulting in only $1 million of the increase being excluded from reassessment, or $3 million of assessed value. This would result in a new property tax bill to the child of $33,000. Since there is no longer an exemption for non-principal residences, the rental property is reassessed to FMV of $1 million, resulting in a tax bill to the child of $11,000. Between the two properties, this is a net increase in annual property taxes of $16,500 over the pre-Prop 19 parent-child exclusion.
 

*1.1% is used for calculating tax bill on taxable value

Proposition 19 also provides benefits for certain homeowners. Under current law, homeowners over fifty-five years old and certain disabled individuals can transfer the taxable value from their current home to a new residence in the same county if the value of the new home is less than or equal to the value of their old home. Proposition 19 allows victims of wildfires and other natural disasters, regardless of their age or disability, to transfer their taxable value to a new home. In addition, homeowners within the preferred classes are no longer limited to purchasing a new home in the same county but can relocate anywhere in the state of California. Also, the value of the new home can be greater than the value of the previous one—though the increase in value must be added to the old home’s transferred assessed value. This change will become effective on April 1, 2021.

If you or your clients have questions about ways you can protect against the effects of Proposition 19, please call or schedule an appointment.

When I moved out of my hometown to go to law school, my grandmother would send me packages of homemade tortillas and chocolate chip cookies. She sent these little tastes of home, not because there were no Mexican grandmothers making tortillas in my new town, but as a way to remind me of her love.

She was so proud of me for daring to reach for my dreams and homemade tortillas were one of her ways to support me. She also tried matchmaking. Anytime I took her to a routine doctor’s visit or even to the hospital in an emergency, “Hi doctor, yes I’m having trouble breathing. Are you married? No? Good, this is my granddaughter, she’s going to be a lawyer.” But that’s another story.

When I meet with families about how to distribute their estate after they pass away, they often want to make similar “I love you” gifts. Gifts of tortillas haven’t come up, instead its usually cash gifts to friends or loved ones. Sometimes these are very small gifts but they represent big love. This usually comes up when we are designing a trust – the most popular way to pass property in California. Note: If you live in California and don’t have revocable living trust and you have children or own your own home, you probably need a trust.

One of the underlying themes with cash or care packages of tortillas and chocolate chip cookies, is that we equate these gifts with love. Take a scenario of a mother who leaves her son $1,000,000 and her daughter $1,000. Many people would ask why only $1,000 to the daughter? When parents do things like this is can be confusing and hurtful to their children. Even though parents usually have some logical reason, it can feel like a slap in the face to the daughter receiving only a percentage of what brother received. Consider also, what will become of the relationship between the son and daughter? Did we make the holidays tense and uncomfortable? Have we torn an emotional gash that will estrange the children from each other for the rest of their lives? We must always consider the impact of our gifting.

In estate planning parlance gifts of money made in a Will or Trust are called “general gifts” and they are often problematic. So much so that California’s preeminent practice guide warns that these gifts “can distort the settlor’s dispositive plan, the trust drafter should counsel sparing use of them.”

What makes these gifts of cash so problematic?

1. A general gift is paid first.

• Consider a father with a net worth of $100,000.
• He wants his daughter to inherit most of his wealth but also wants to make sure his best fishing pal is remembered with a gift of $10,000.
• If father dies right after signing his trust, the fishing buddy would get a cash gift of $10,000 and his daughter would inherit everything else, $90,000. But it also almost never happens this way.
• Most commonly, father goes on his merry way, happy that he’s taken care of his daughter and made a nice gift to his fishing buddy.
• Years later, father has had some medical issues and spent a large amount of his savings on his medical care.  
• When he passes away, father’s estate is only worth $11,000. The general gift is paid first so his fishing buddy gets a $10,000 and his daughter inherits the remainder, just $1,000. Was this father’s intent? What will the daughter think? Remember, when dealing with the death of a loved one, money equals love.

Consider that even if the trust value is at least $100k when dad dies, all the assets might not be held in cash. For example, dad could own a $100K a home intending that daughter inherit it when he dies. On his death, the trustee is require to make the general gift first so the house is sole to pay the $10,000 gift to the fishing buddy. Again, not the outcome dad would have wanted.

• Your Trust is Mostly Private Unless It’s Not

One of the benefits of a trust is that it is a private document. Unlike a Will, it is not filed in a courthouse for the world to read. This is a real benefit because bad guys and fraudsters are staying up nights to separate your heirs from your money.

I am not a fan of hiding things unless there is a good reason to do so. Justice Brennan said “sunlight is the best disinfectant” and I often refer to that adage when trying to decide the best way to make a gift. Secrets among family members have a habit of causing trouble. However, there are times and good reasons for keeping things private.

Under California law, when you pass away certain people have a right to demand to see a copy of the trust. Typically, those people include your heirs at law (people who would have inherited if you did not have a Will or Trust) and those people named in your trust.  

If you leave dramatically different general gifts in your trust it can cause hurt feelings, driving people to fight and even litigate over what they thought they should have inherited. Do you want your niece to know how much you gave to her cousin? If not, better to make a gift in another way.

Your Gift May Not Be So Great After All

When I graduated from college with a degree in accounting my first job at prestigious tech company paid $15 per hour plus benefits. I happy with that. Now, over 20 years later, that is barely minimum wage in my town.

Consider that your very generous gift of $25K today might be spare change in 20 years and not have the impact you intended.  

So, is there a better alternative than a general gift in a trust?

I think so. Here are some alternatives to consider:

• Give a percent of your estate.

In our first example, dad could have divided his estate in percentages: 10% to his buddy and 90% daughter. When dad passed away with %11,000, the buddy would have inherited $1,100  and daughter $8,900 – which was dad’s likely intent.

• Use life insurance

A life insurance policy pays out a benefit to your beneficiaries when you die. There are some drawbacks to life insurance, for example if you forget to pay the premium or fail to update beneficiary designations.

• Name your intended heir as pay on death beneficiary of a bank account, brokerage account, IRA, etc.

Using bank accounts like this are called “will substitutes” and they have their own set of risks and drawbacks. For example, my grandfather set up bank accounts naming my sister and I as pay on death beneficiaries. At some point, the accounts were either closed or emptied and when he died there was nothing for us. We were left to wonder did he intentionally disinherit us? Was he defrauded by a caregiver? Did he simply need the money during the end of his life? We will never know.

There are other issues with these will substitutes but there is a time and place for them.

• Give the money now

A huge benefit of making a gift today is that you get the satisfaction of seeing someone really appreciate your gift because you are alive, after all. A drawback is that if you need the money for yourself later on, you won’t have it anymore. Also, some people feel that a gift made in a Will or Trust is more impactful than a lifetime gift. If you choose to do this, keep track of these gifts and keep your estate planning attorney and CPA informed.   

Everyone’s circumstances are different and if your attorney suggests making general gifts that’s likely the best arrangement for you in your current circumstances.

There are certainly other considerations that I have not mentioned here with transferring cash and property. What are some creative ideas you have for making gifts of cash after you pass away? 

Remember that everything you read on this website is for general information and entertainment purposes only. Do not take action or fail to act based on anything you read on this site. If anything you read on this website raises questions or concerns for you, take all that to your attorney so that you can get advice that is appropriate for you.

My titles are many: attorney, counselor, advocate. I am also someone’s daughter, sister, friend and wife. But the title that has taught me the most and challenged me to constantly step-up to be a better person, is that of mother. The lessons I learn as “mother” seem to always have far deeper implications than at first glance and in fact, they inform my entire life.

I was recently reminded of how much I have learned and how much more I have to go one pandemic afternoon when my daughter and I sat down to paint our nails. Remembering how often she begged to paint my nails as a little 6-year old girl, I asked if she wanted to paint my nails.

“No, thanks . . .  I remember when I was like 6, and I always wanted paint your nails. And one time I asked if I could and you said ‘no’.”

“Yeah?”

“Yeah, you said no because you didn’t want it to look like a 6-year-old painted your nails,” she laughed.

This is true and I remember and regret saying it. For the record, she painted my nails plenty of times, but for some reason, on that particular day, I didn’t want her to do it. Like most things in life I have been given a second chance both to sit with my daughter and to reflect on why it was so important for me to let her paint my nails.

What she was asking as a little girl was not, “Mommy, do I have the nail painting skills to be worth of the brush to Cherry Crush red?” No, she was asking, “Can I try and probably do a pretty bad paint job with you? You see, I need to try, and fail, in a safe place so that I can learn to do it properly when I am older.”

I didn’t realize this was her message until I started seeing this over and over again in my practice. Parents, who like me, worried about trusting their children with small decisions that could be used to build up to real responsibility. You see, it’s like compounding interest, it’s a cumulative thing. We give small tasks. We demonstrate how to cope with setbacks by supporting our kids but also by coping with our own setbacks in a constructive way. We do our children no favors by protecting them from messy nail polish jobs. The lesson is in what to do when nail polish gets all over your thumb, when you accidentally smudge it while it’s still wet and how paint your tiny pinky nail,

There’s a popular phrase right now, “you will succeed or you will learn.” It embraces the growth mindset that took the education community by storm a decade or so ago and was first introduced to the mainstream public by Carol Dweck in her book, Mindset: The New Psychology of Success.

It’s been 6 years, and I regret not letting my daughter paint my nails every time she asked. Now, as an accomplished nail polish painter, she no longer asks to paint my nails. Why would she? It’s a skill she has already mastered.

The topics are now about managing money, friendships and social media. Every day, I practice to keep my ears and my heart open so I can be available to say, “yes, of course.”

Many people consider naming the minor children’s legal guardian as the trustee of their trust. If both parents pass away, a legal guardian will be responsible for the day to day life of the children.

The benefits of this would be that the guardian doesn’t have to consult with someone else regarding purchases and expenses and, presumably, the guardian knows best what type of costs are appropriate.

However, the responsibility of acting as day-to-day caregiver for a child (often under stressful circumstances with little or no notice) and also as trustee of the trust can be physically and emotionally taxing for even the most dedicated caregiver.  

We must also consider whether the best caregiver for a child would also make a good trustee, i.e. a financial steward.

Parents who are lucky enough to know several reliable and trusted people, often choose a different friend or family member to be trustee. This allows the guardian to focus on the job of raising the child.

There are also a growing number of parents who choose to use a professional fiduciary to act as trustee. Professional fiduciaries are licensed and regulated by the State of California. The Professional Fiduciary Association of California (https://pfac-pro.org/) has useful information about this growing profession.

Here are some tips for choosing a trustee:

• Expertise is not required.  It is important to select a trustee with good judgment and common sense. Someone who is organized and can keep good records is a good choice. A trustee must be comfortable doing research and asking for help.

• Consider the trustee’s age. Because a trust for a young child is likely to be administered for a significant length of time – possibly decades – it is a good idea to consider the age and health of your trustee. Naming multiple successor trustees and revisiting their appropriateness is critical.

• Consider the team approach. In some circumstances, naming more than one trustee (i.e. co-trustees) may be appropriate. Some benefits of having co-trustees are the sharing of administrative duties and preventing one person’s judgment from controlling all decisions and distributions. If one of your co-trustees is not a U.S. citizen, consider naming a U.S. citizen co-trustee to avoid the cost and complications that come with having a foreign trustee.

• Sometimes a professional trustee is best. When there are few friends or family members who could do this important job, if the trust contains a large amount of money or if there are concerns about family conflicts, a professional or institutional trustee may be best.

Have more questions about your estate plan? Feel free to call or schedule a time to meet with me.

Are you considering all of your assets?

When we think about our assets, we most often think of things that we buy or earn, like cash or cars. However, we can also create assets – our intellectual property.

Creations like music compositions, dance performances, mobile apps, etc. can be a source of income for yourself, family members and loved ones.

What Is Intellectual Property?

You don’t have a be a famous painter or a rock star to have intellectual property. Intellectual property is simply a work or invention that is the result of the human creativity and intellect and can be legally protected, e.g., by copyrights, patents, and trademarks. It is protected by federal (and sometimes state) law and can have great economical value.

Intellectual property can be given, sold and inherited. However, some intellectual property, like patents, must be registered during the lifetime of the creator while others, like copyrights, can be registered by the estate of the creator.

Take Steps to Protect Your Intellectual Property

Different steps are necessary to legally protect different types of intellectual property. Here is a summary of how to protect some of the most common types:

When You Don’t Own Your Intellectual Property

As discussed above, intellectual property should be registered to protect it from misappropriation by others. However, you can sell, give away, donate or lose your intellectual property.

With “work for hire,” an original work is created for someone else. For example, an artist who was hired to paint a mural on a wall, certainly has a copyright in the created artwork but that copyright is owned by wall owner.

Also, even if you register your intellectual property, you must actively protect it. For example, with a copyright, the owner must actively enforce the copyright to prevent it from being declared “in the public domain,” a famous example is the “Happy Birthday” song.  

If you are not sure whether you or a loved one own intellectual property, consider consulting with an intellectual property attorney.

Include Your Intellectual Property in Your Estate Plan

It is important to include your intellectual property in your estate plan to protect it and to maximize its value. Before we create or update your estate plan, be sure to provide us with a list of all of your intellectual property, as well as any related agreements, assignments, or licenses.

Special issues with copyright.
If you own a copyright, you should specifically state both the title of the original work, i.e., the book, painting, etc., and the details of your copyright in your will or trust. If your copyright is not specifically mentioned in your will or trust, it will be transferred to your heirs by a residuary clause, which disposes of all property not specifically dealt with elsewhere in your will whereas the original work could be transferred differently. As a result, one person could end up with the book or painting and others with the copyright. In addition, depending upon how valuable the copyright is, the heirs who inherit it could have a heavier tax burden.

Because the future value of a copyright is impossible for the creator of a work to know, copyright law gives the creator the right to terminate most transfers or licenses of the copyright at a future date, providing the creator with an opportunity to market the work once its fair value is known. This termination right, which passes under copyright law to the creator’s surviving spouse and children when he or she dies, cannot be waived or transferred to anyone else during the creator’s life. If the creator transfers the copyright, e.g., to a trust, the statutory heirs (the people the state statute says will have the termination right) could undo the creator’s intent. The only exception is a transfer of the copyright by a will, which cannot be terminated by the statutory heirs. Although establishing a trust is preferable for many types of property to avoid probate, ask your attorney whether transfer of your copyright by Will is a better option in your situation.

Patents
Unlike copyrights, there is no termination right for patents, which can be freely transferred by a will or to a trust for the benefit of the loved ones you chose. Transferring ownership to a trust is often a good choice to avoid the expense, time, and lack of privacy of the probate proceedings required for transfers using a will. Your patents should be clearly identified in your estate planning documents, which should state the owner of the patent, the patent number, those who have the right to license the patent, and the parties who are responsible for paying the fees required to maintain the patent. In addition, the United States Patent and Trademark Office should be provided documentation showing the transfer to the new owner.

Trademarks
Similar to a patent, a registered trademark can be transferred by either a will or by establishing a trust to benefit your loved ones. As is the case with patents, a trust is often the better choice. Documentation should be sent to the United States Patent and Trademark Office to record the transfer of the trademark registration to the new owner. It is important for the executor or the trustee or any individual who inherits a registered trademark to continue to defend it against infringement and use the mark to maintain the legal protection provided by trademark law. In addition, the executor, trustee, or new owner should continue to renew the trademarks and pay the required fees.

Royalties
Intellectual property that has been transferred or licensed to another party often generates royalties or other income that become part of your estate. Those payments could be directed to a living trust or a trust established at your death. When you pass away, any publishers or other agencies should be notified to direct the payments to the trust or to the loved ones who have inherited the right to receive those royalties.

Consider naming an executor or trustee with expertise in managing intellectual property and the income it generates for the benefit of your loved ones to maximize its value.

Give Us a Call

Estate planning for intellectual property can be quite complicated. An experienced estate planning attorney can help ensure that the products of your creativity are properly protected and passed on to your family and loved ones in the way you intend. Call today or schedule a consultation to ensure that your estate planning goals for your intellectual property are achieved.

Most lawyers are old fashioned – we like paper, regular mail, signatures in pen, the oxford comma.  A lawyer’s duty is to protect and defend their clients and that means protecting privacy. I think I can speak for most attorneys when I say that cloud-based services make us uncomfortable. 

Like the famous quote, “you can’t stop progress,” I have been adopting cloud-based tools that both help me to advance my clients’ interests and protect their privacy. 

All this poses a huge learning curve for me. And so, last night, as my family cleaned up after dinner (thanks, kids!) and settled in for a Saturday night movie, I found myself on the phone, once again,  with a help desk technician. 

As he patiently walked me through the steps of a relatively simple task, I heard the crow of a rooster through the phone.

“Is it morning where you are?” I asked.

There was a long pause, “Yes, excuse me, I’m so sorry. We are all working from home here. My apologies that you heard that.” 

“No, it’s lovely. It’s easy to forget that there is a real person on the other end of the line.”

Clearly surprised by my comment, he paused and then chuckled. Although we were half a world apart, we were connected, as humans, living through this historic moment.  

Thank you help desk technicians. For turning your home into an office. For your patience and kindness. I couldn’t do this without you. 

Here’s a lovely remake of the 1988 “We Are the World” adapted for the current pandemic.

Q: As a married couple, should you hold your home as joint tenants or as community property?

Answer: It depends.

Before we get started, make sure you read this disclaimer. If you have any questions about your own circumstances, talk to your attorney or contact me to schedule a consultation.

When you bought your home, it’s most likely that the title company prepared a deed. Below is a picture of a real deed:

Among many things, the deed includes the name of the person who sold you the property, your name, a legal description of your property and also the legal form of your ownership. For example, if you were single when you bought the property, it probably says something like: “Albus Dumbledore, an unmarried man.”

Deeds are public documents. They tell the world who owns the property. This is important because, in our example, if Dumbledore wants to sell the property, the buyer needs to have a way to confirm that Dumbledore is the rightful owner. The buyer does that by looking at the deed on file with the county recorder. Property deeds are so important that they are sometimes kept for hundreds years to document land ownership. 

When a married couple buys a home, typically the title company creates a deed for the couple. In my experience title companies usually describe the legal form of ownership as something like, “Harry Potter and Ginny Weasley, husband and wife, as joint tenants.” This special language tells the world that both Harry and Ginny are equal owners of the property. Sometimes the title company goes further and the ownership looks like this:  “Harry Potter and Ginny Weasley, husband and wife, as joint tenants with right of survivorship.” This special survivorship language means that when either Harry or Ginny die, the other becomes the owner of the entire property. 

In California, married couples and registered domestic partners can choose to hold their home as “community property.” If property is held as such, the language looks like this: Harry Potter and Ginny Weasley, husband and wife, as community property.” Land held as community property has an implied right of survivorship, even it doesn’t say it on the deed.

The decision to hold property as joint tenants or as community property can have a dramatic impact on each person’s property rights, their ability to shield property from a debt or judgment, and their eventual tax bill. In this article, I address only the tax impact of a joint tenancy versus community property.

To understand this we need to understand “basis”. 

Imagine Dumbledore and McGonagall own Hogwarts as joint tenants after buying it from the Ministry of Magic for $1,000. They sell it to Harry for $3,000. The $1,000 paid to the Ministry is their basis. The $2,000 difference between the basis and the sales price is taxable gain and where there is taxable gain, the IRS wants a share. Dumbledore and McGonagall will need to write a check to the IRS, if their tax rate is 20%, they will need to pay $400. In the end, they will have $2,600 left of their $3,000 sale price. The same is true for you when you sell your home. 

But . . . the tax law does peculiar things to the property tax basis when death is involved. It’s not magic but an act of congress. The tax basis actually increases on death. This increase in tax basis decreases the taxable gain. Let’s see how that works: 

Instead of selling Hogwarts, imagine that McGonagall inherits Hogwarts when Dumbledore dies. The tax law gives her a new tax basis on Dumbledore’s half, which is now $1,500 (½ of the fair value of Hogwarts when Dumbledore died). When you add the new, stepped up basis of Dumbledore’s share to McGonagall’s own basis of $500 (1/2 the purchase price), she will have a new basis of $2,000 ($1,500 + $500). When she sells it to Harry for $3,000 and deducts her tax basis, her taxable gain is only $1,000.  With a tax rate of 20%, she would write the IRS a check for $200 and keep $2,800 of the sales price.

Now, remember community property discussed above?

If Dumbledore and McGonagall were married and held Hogwarts as community property, McGonagall would inherit Dumbledore’s share just like above, but she would get a new tax basis for ALL of Hogwarts, not just Dumbledore’s half. Under community property law, McGonagall’s new basis would be $3,000.

Why is this? Tax laws are written by politicians to encourage people to do things and politicians want to encourage people to get married. This means that when McGonagall sells Hogwarts to Harry for $3,000 and deducts her new $3,000 basis, she has $0 taxable gain. She keeps the entire $3,000. And so would you.

Title to property involves complex and multiple considerations. You should always talk with an attorney before changing title or taking title to property.

Hogwarts, Harry Potter, McGonagall and Dumbldore are the property of J.K. Rowling and NBCUniversal.