California Deeds for Living Trusts and Limited Liability Companies Tip Sheet by Mark W. Bidwell

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Tip sheet on how to transfer California real property into trusts and limited liability companies by Mark W. Bidwell, attorney. Tip sheet explains the process and tax consequences.

Mark W. Bidwell, Attorney at Law

Californians create living trusts to avoid probate of real estate and create Limited Liability Companies for real property protection. Both require a deed to change ownership. Mark W. Bidwell, an attorney, has created a website DeedAndRecord.com to prepare deeds and record deeds with the county recorder.

A deed is a document signed by the owner of the real property that transfers ownership. Deeds are either “warranty deed” “grant deed” or “quit claim deed.” Grant deeds and warranty deeds by law have the owner’s promises he or she has not conveyed the property to someone else and the real property does not have any taxes, loans, assessments or liens secured by the real property. A quit claim deed conveys ownership “as is.”

The deed must be part of the public database maintained by each county in California. The deed is “recorded” in the county where the real property is located. This puts the world on notice how title is held and is the final word on ownership.

Trusts must be funded with real property to avoid probate. Funding is by deed from the owner to the owner as trustee of his or her trust. There is no transfer tax, property tax increase or transfer tax on trust transfers. On death of the owner, the successor trustee transfers real property by deed to heirs of the decedent.

Trust transfers of real property by a married couple have a unique problem. A transfer out of joint tenancy into a living trust may not be treated as community property by the IRS for a full step-up in basis and the opportunity to avoid or reduce capital gains tax is missed.

If community property treatment is desired, the more conservative approach is in writing expressly state the real estate is community property. The easiest way to do this is to place community property affirmation directly on the deed terminating the joint tenancy to fund the real property into the trust.

The “community property” designation reduces or eliminates capital gains tax. The surviving spouse receives a full step-up in basis on real property. “Community property” designation has legal issues in the event of divorce or dissolution of marriage. Separate property interest in real property designated as community property may lose its separate property interest and the other spouse obtains a one-half ownership in the real property in the event of a divorce.

California Limited Liabilities Companies (“LLCs”) are often used to own real property for asset protection. To shield the owner from individual liability the real property must be owned by the LLC.

Prior to transfer the owner should obtain written permission from the lender. Real estate securing a loan has a “due on sale clause" in the promissory note. The promissory note allows the lender to “call” the loan as due and payable in full anytime there is a change in ownership.

The transfer from an owner as an individual to the same owner of a Limited Liability Company is considered a change in ownership in the due on sale clause. Even if the proportional ownership interest remains exactly the same the transfer is a change in ownership in a loan document and the entire balance may become due and payable.

If ownership interest in the Limited Liability Company and the real property is the same there is no transfer tax and no increase the property tax basis. California has transfer tax and property tax exemptions if proportional interests are kept the same.

If any change in ownership does occur the proportional change at fair market value is subject to transfer tax. The basis for property tax will also be increased proportionally to the fair market value of the real property for property tax. A Limited Liability Company owned by one individual or a married company is disregard for income tax purposes and no additional tax return is needed. Limited Liability Companies allow flow through income and capital gains and as a result avoid double taxation.

Mark W. Bidwell is an attorney licensed to practice in California. Marketing is through the internet, primarily the website http://www.DeedAndRecord.com. Office is at 18831 Von Karman Avenue, Suite 270, Irvine, California 92612. Phone number is 949-474-0961. Email is Mark(at)DeedAndRecord(dot)com.

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Mark Bidwell
Deed and Record
+1 (949) 474-0961
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Deed and Record

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