The Demand Institute estimates that American Millennials will spend $1.6 trillion to buy homes in the next 5 years. That’s 8.3 million new Millennial households by 2020.
Millennials are savvy consumers who do their homework before buying something, so I expect no less when they're buying a home with their significant other.
But there’s one mistake Millennial married couples in California don't know they're making: They're buying their homes as “joint tenants.”
Why Do Millennials Make This Mistake?
Because everyone else is doing it. It’s hard to blame them when their parents and friends are making the same mistake and telling them that this is the best option.
Heck, even many real estate and escrow agents don't know better.
Popular opinion says married couples should own their home as “husband and wife, as joint tenants with right of survivorship” because if something should happen to one spouse, the survivor will automatically own the home without going through probate court.
But owning your home as joint tenants won’t give you the added perks and protections that two superior methods offers you. And it'll cost you time and money.
Here’s A Better Way To Own Your Home
Your better option is to own your home as “community property with right of survivorship.”
Community property means property that a married couple shares, 50/50.
Owning your home as community property gives you the same advantage as owning it as joint tenants. When one spouse dies, the survivor will be the sole owner without going through probate.
Community property is better than joint tenancy because it can help you avoid a big tax bill.
Meet Sarah, a Millennial. After Sarah received a significant payout when her startup was acquired in 2010, she and her husband bought a house for $500,000. A freak accident sadly killed her husband a few weeks ago. Now a single mother, Sarah wants to sell the home for $2 million and move back in with her parents.
If Sarah and her husband owned their home as joint tenants, she will need to pay between $50,000 and $100,000 in capital gains taxes when she sells the home, depending on her tax bracket.
If they owned their home as community property, Sarah will make $1.5 million dollars and pay ZERO taxes. She could use that extra money on her child's college tuition.
Community property uses the power of "step-up in basis," a tax principal that I won't explain for the sake of your sanity. Google it at your own peril.
You don't need to pay extra to hold title as community property, so take advantage of this perk that California offers to married couples.
Community property is great, but there's an even better strategy . . .
Here’s The BEST Way To Own Your Home
The best way to own a home is with a revocable living trust.
As Millennials, we think we'll live for a 100 years or more. But accidents and deadly diseases happen, so it would be irresponsible to not have a plan to protect your loved ones if something should happen to you.
These are 5 problems only a trust can help you avoid:
1. Limitations Caused By Disability: If you or your spouse was unable to make decisions due to an illness or disability, the other would be unable to sell the house or refinance the mortgage until they get a court order through an exhausting conservatorship proceeding. This could kill you if you need money quickly for special medical care that's not covered by your insurance. If you had a trust, the healthy spouse can legally take action without going to court.
2. Second Marriages: If you die and your spouse remarries, he or she can freely share your home with her new lover and might not leave anything for your kids. With a trust, you have several options to protect your kids’ inheritance.
3. Stuck In Probate: When both you and your spouse leave this world in a year far, far away, your assets will be stuck in probate court for one to two years before your kids can get them. And probate is very expensive. Your trust will help your family avoid probate and transfer your things to your children quickly.
4. Inheritance Issues: How do you make sure your kids can inherit your home if something happens to you and your spouse? What if your kids are too young to manage the home? Who will make sure it won’t be sold and your kid won’t end up in foster care? A trust and other parts of your estate plan will protect your kids and ensure they will have a roof over their heads.
5. Family Feud: There's a chance your spouse, children, and family will fight over who should get the house. That's a lot of attorney’s fees and time spent in court. A trust reduces the likelihood of litigation and makes it clear who you want your house to go to.
Own It The Right Way
Your revocable living trust can give you peace of mind and a plan to avoid mistakes most Millennials are making with their homes. To learn how I help my clients set up their living trust, read my article, "5 Step Fast Pass To Your Estate Plan."
Consult with a professional before taking any action. Just like you wouldn’t diagnose a serious disease by yourself with WebMD, don't leave your biggest asset in the hands of a Google search and do-it-yourself forms.
If you have any questions, we invite you to email Edmund Yan, Los Angeles Estate Planning Lawyer, at email@example.com.