Title and Vesting - Part 3 - Chapters 24-26 Flashcards
Understand the role of a sellers broker in the conveyance of property rights by a married individual or couple
A broker who represents a married individual in a sale, purchase lease or financing of community real estate needs to know whether the performance of the married individual under a listing (paying the fee), or purchase agreement (closing escrow) or a lease agreement may be negated by community property defense as held by the other spouse. When the broker is unaware, the individual can inflict a loss on the broker.
Know how property rights may be transferred between spouses by transmutation
To circumvent the need to obtain a quitclaim deed or determine whether a transmutation has occurred, real estate may be vested in a limited liability company LLC solely owned by one spouse, or owned by both spouses with only one spouse as the manager of the LLC.
A transmutation occurs when a married individual or couple transfers personal or real property from:
- community property to a separate property interest of one spouse
- a separate property interest of one spouse to community property or
- a separate property interest of one spouse to the separate property interest of the other.
A transmutation needs to be written and recorded to be effective against persons relying on the record title. For a written declaration to express intent to transmute property from a Community Asset to a separate asset of one spouse, the Declaration signed needs to contain an explicit statement confirming the spouse conveys and terminates the community property interest held in the property.
The use of the word “transmutation” is NOT required in a transfer document to transmute property.
Other instruments and entities which may be used to authorize one spouse to manage and control community property include:
- a power of attorney
- a revocable trust in which one spouse is the named trustee
- a limited partnership.
Understand when a transfer of property rights requires consent by both spouses
Both spouses need to consent to a sale, lease for more than one year or encumbrance of community real estate.
When one spouse, without the consent of the other, sells, leases for more than one year or encumbers community real estate, the non-consenting spouse may either ratify the transaction or have it set aside. The non-consenting spouse has ONE YEAR from the recording of the transaction to file an action to set it aside. Note however when a third party to the transaction – a buyer, tenant or lender - has no notice of the marriage, the transaction may not be set aside.
transmutation
TRANSMUTATION is the transfer of property between separate property and community property or between the separate property interest owned by spouses. A transmutation needs to be written and recorded to be effective against persons relying on the record title. The recording requirement gives notice to others who rely on the recorded title such as title insurance companies, buyers, tenants, lenders, whose rights may be affected by a transmutation (such as family members).
Understand the use of a inter vivos (living) trust vesting to avoid probate supervision of a deceased owner’s real estate
An individual owner of property, real or personal, creates a revocable inter vivos living trust to hold title to their property for multiple reasons, primarily:
- to accommodate the distribution of the owner’s estate which remains at the time of the owner’s death, without resorting to probate proceedings under a will, and
- to retain the interim ability to sell, encumber, lease or remove the property from the trust vesting without the debilities imposed by other estate planning vestings, such as joint tenancy or community property vesting.
Alternatively, spouses who want to best accomplish the passing of their community property to the surviving spouse are best served by using a right of survivorship vesting, which eliminates the need for a conveyance from the successor trustee under the inter vivos living trust on the death of a spouse. Additionally, under these vestings, the right of survivorship may be individually severed by either spouse.
Distinguish a inter vivos (living) trust from other trust arrangements
A revocable inter vivos living trust is not a vesting or legal entity separate or different from the owner, such as a partnership, limited liability company or corporate form of ownership.
The singular advantage of a revocable inter vivos living trust is its ability to perform the same function as a will while avoiding probate procedures.
Any trust created for the purpose of holding title to real estate for another person is only valid if the trust relationship with the trustee is declared in writing.
The elements necessary to enter into a statutory inter vivos living trust agreement include:
- the owners declaration to establish a trust as a trustor (sometimes called the settlor) -
- ** This is called a Declaration of Trust***
- identification of a trustee (usually the owner) to manage title to properties vested in the trustee as instructed by the trust agreement
- actual conveyance of property (called the corpus or trust property) to the trustee
- successors, called beneficiaries, to receive the trust property on the death of the owner.
The owner has to sign and record grant deeds conveying their real estate into the trust vesting.
Real estate brokers, escrow companies, title companies, Banks operating a trust business and attorneys are commonly employed by principals to act as their agents. They are subject to the duties of a trust relationship, which are imposed while the agent holds title to or manages property owned by the principal.
trustee
A TRUSTEE is one who holds title to real estate in trust for another.
beneficiary
A BENEFICIARY is one entitled to the benefits of properties held in a trust or estate, with title vested in a trustee or executor.
trust business does NOT equal business trust
The TRUST COMPANY is any Corporation or bank which is authorized to engage in the activities of a trust. A TRUST BUSINESS is a business which acts as an executor, administrator, guardian or conservator of estate, or as assignee, receiver, depository, or trustee by the appointment of the court or for any purpose permitted by law.
NOTE - A TRUST BUSINESS in California has a distinctly different relationship with the public then the relationship established by the activities of an out-of-state BUSINESS TRUST.
A BUSINESS TRUST is a type of business entity which is not recognized in California. Out of state business trusts are required to first qualify as a corporate entity with the Department of Business Oversight (DBO) before doing business in California.
Business trusts, frequently called Massachusetts Trusts, and are engaged in general business, not in the trust business. The relationships created under a business trust arrangement do not include the trust relationship between a principal (beneficiary) and their agent (trustee).
Business trusts are considered foreign corporations. Thus, a business trust, as a foreign corporation in California, needs to qualify with a state agency before:
- conducting any business in California or
- accepting money from investors in exchange for share ownership in the trust entity.
real estate investment trust (REIT)
A REAL ESTATE INVESTMENT TRUST (REIT) is an entity issuing Securities held by investors and traded on the stock market, holding title to income-generating Property, Trust deeds and treasury bonds.
A real estate investment trust REIT is authorized to be created under California law only if it has been:
- formed as an REIT under the Internal Revenue code and does business under the code and
- qualified by the Division of Corporations
The beneficiaries who invest in this real estate ownership entity are called shareowners. The share owners hold transferable shares which are sold publicly.
Securities are fungible and tradable financial instruments used to raise capital in public and private markets. There are primarily three types of securities: equity—which provides ownership rights to holders; debt—essentially loans repaid with periodic payments; and hybrids—which combine aspects of debt and equity.
What is a Security?
Equity securities – which includes stocks.
Debt securities – which includes bonds and banknotes.
Derivatives – which includes options. There are two types of options: calls and puts. US options can be exercised at any time and futures.
inter vivos (living) trust
A REVOCABLE INTER VIVIOS LIVING TRUST is the legal name for a Family Trust.
Distinguish between the co-ownership of real estate and having a co-ownership interest in an entity that owns real estate
When a group of investors purchases real estate, the vestings available to properly structure their common ownership interest include taking title in the name of:
- each of the investors, or their trustees, as tenants-in-common (TIC)
- a limited liability company (LLC) owned by the group or
- a partnership (general or Limited) comprised of the group.
CORPORATE ownership and vesting of real estate is infrequently used by investors in real estate held for rental income or profits due to adverse tax consequences whether reporting as a C or S corporation.
** NOTE - Adverse tax consequences make corporate ownership and vesting of rental real estate infrequent. **
Co-owners of California real estate vested as TICs, when engaged in the business of jointly operating the property on terms calling for them to share income and profits, are conducting themselves as partners. Each co-owner actually holds title as a trustee on behalf of all the TIC co-owners, collectively called a partnership.
By the sharing of income among co-owners who are vested as TICs, a tenancy in Partnership is established.
A TIC vesting does not control the possessory rights of the co-owners when the co-ownership conduct in fact constitutes a California partnership. For example, a partner may use or possess partnership property only on behalf of the partnership, while a common law TIC co-owner (as viewed by the Internal Revenue Service) may use, possess or lease the property themselves, without regard to any other co-owner.
The conveyance of a co-owners TIC interest to another person conveys nothing more than the co-owners equitable ownership of the property.*
Identify the differences between California partnership law and federal tax law regarding co-ownership and management of real estate
TIC ownership does not rise to tax partner status unless the co-owners are operating as:
- a declared partnership (general or limited)
- an LLC which has not elected to report as a corporation or
- a Cooperative TIC.
To avoid federal tax partnership status, each co-owner vested as a TIC needs to have the unrestricted common law right by agreement to independently alienate their fractional interest without the prior consent of the other co-owners.
The penalty for a TIC co-owner who is federally classified as a tax partner in the ownership of either the property sold for the property acquired in a 1031 reinvestment plan, is the loss of the entire 1031 tax exemption for profit taken on the property sold.
When a co-owner of investment real estate is classified by the IRS as a partner, the real estate is considered to be owned by a TAX PARTNERSHIP. Classified as a partner, the co-owners ownership interest is that of a share in a partnership and does NOT qualify as a 1031 property.*
Understand the advantages of using a limited liability company (LLC) or limited partnership (LP) to hold title to fractional ownership interest instead of as a tenant in common (TIC) with all other co-owners
A formal LLC operating agreement or partnership agreement and an LLC or a partnership vesting avoids interference with Title by a co-owner and their creditors. A creditor may only attached, via a charging order issued by a court, a co-owner’s ownership interest in the LLC or partnership, and never the real estate owned by the LLC or partnership unless the LLC or partnership also owes the money.
tenants in common (TIC)
TENANTS IN COMMON (TIC) is the co-ownership of real estate by two or more persons who each hold equal or unequal undivided interest, without the right of survivorship.
