How You Take Title Can Have Huge Consequences
How you hold title in your home can
be crucial when you decide to sell it, will it, get sued, etc. Title is not a small
matter. The best option is to consult your attorney and/or your accountant.
Below we describe the pros and cons of the five most common
methods of holding title in real estate.
Sole Ownership
As it says, this is when one person
holds the title in their name alone. You don't have to be single to have sole ownership.
Legally, this is known as ownership in severalty.
If you are married and wish to take sole ownership, usually
your spouse signs a quitclaim deed giving up any ownership interest in the property.
There are no special advantages in holding title in sole
ownership. When the sole owner dies, any property is subject to probate court costs and
delays.
Tenants in Common
This method of holding title is used
when two or more people take title to a piece of property. This is a common method of
holding title when the people involved are not married to each other.
Tenants in common own a specified interest in the property.
The interest can, and often is, unequal. For example, three people, or entities, could own
a piece of property with one owning 40% and the other two owning 30% each. What percentage
is owned by which party is specified on the deed.
The major advantage of this form of ownership is that each
owner can sell or will his interest to whomever he or she wishes. Tenants in common is
popular in second marriages where each spouse wants to will his or her share to the
children from the first marriage.
The disadvantages of tenancy in common begin with the
property being subject to probate court costs and delays. Another disadvantage is that the
remaining tenant(s) could end up owning property with a stranger.
Another disadvantage is that a tenant in common can bring a
partition lawsuit to force the sale of the property.
Joint Tenancy with Right of Survivorship
This form of title has some special
conditions. First, all co-owners must take title at the same time. Second, all co-owners
have equal shares. The surviving co-owner winds up owning the entire property. This form
of title is sometimes called tenancy by the entireties when husband and wife are
concerned.
After a joint tenant dies, the surviving joint tenant(s)
receives the deceased's share. The deceased's will has no effect on joint tenancy
property.
The big advantage to this is that the property does not go
through probate, thereby avoiding cost and delays. To clear the title usually involves
recording an affidavit of survivorship and a certified copy of the death certificate.
When joint tenancy is not held by husband and wife, a joint
tenant can sell or give his property interest away without permission of the other
tenant(s). Could be a problem. If there are only two joint tenants and one sells or gives
away his interest in the property, the title becomes a tenancy in common.
Community Property
This option is available to husbands
and wives only in community property states. California is a community property state.
Each spouse owns half the property and can pass it on by will either to the surviving
spouse or someone else.
A special advantage to community property title is that when
willed to a surviving spouse , a new stepped-up basis at market value is assigned on the
date of death.
This stepped-up basis advantage is also available to
husbands and wives holding joint tenancy titles in community property states. It requires
spouses to acknowledge in writing to each other that their joint tenancy property is also
community property.
Living Trust
The living trust has become
increasingly popular because property in a revocable living trust is not subject to the
costs and delays of probate.
Another major advantage of the living trust is that court
challenges are almost impossible, unlike the challenges to wills, which occur all to
often.
All kinds of property can be held in a living trust, not
just real estate: stocks, bonds, bank accounts, cars, boats, airplanes, art and any other
major asset. A revocable living trust allows these assets to be bought, sold and financed
normally.
We highly recommend talking to your
attorney and/or accountant before deciding how to take title.
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