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How Should You Hold Title to Real Estate?
Your home is probably the most valuable asset you own. Yet most people do not think about how to hold title until the title company poses the question when you buy or refinance. But how you hold title to real estate deserves careful consideration because it has far-reaching effects. Let’s look at some common ways to hold title.
Individual name. You can hold title in just your name even if you are married. However, there are some drawbacks you should know about.
First, what would happen if you become mentally or physically incapacitated due to illness or injury and the property needs to be refinanced, or a line of credit needs to be opened or increased? If you are unable to conduct business, the court will need to appoint someone to act for you.
“But I have a will,” you say. A will cannot help: it only goes into effect after you pass on, not if you are incapacitated.
“But I have a power of attorney,” you say. A power of attorney ends at incapacity unless it is a durable power of attorney, which is valid at incapacity. However, many financial institutions will not accept one unless it is on their form. And if accepted, it may work too well, giving the person named in the power of attorney the ability to do whatever that person wants with your assets. You could recover to find the property mismanaged or even sold and the proceeds gone.
The court’s job is to provide supervision to protect your assets. But once the court gets involved, it will stay involved until you recover or pass on. The court, not your family or friends, will control how your assets are used to care for you. It is a public process that can be expensive, embarrassing, time-consuming, and difficult to end if you recover.
Next, what happens when you pass on? If your name is the only name on the title, the property will almost certainly have to go through the probate court system before it can be distributed to your heirs, even if you have a will. Think about it: if your name is the only one on the title, and you have passed on, you cannot sign your name to transfer title. While there can be exceptions, in most cases, the only way to remove your name and enter the new owner’s name is through the probate court and the appointment of an executor or personal representative to transfer your property.
Joint tenants with right of survivorship. This is how most married couples hold title because it seems fair, it is easy, and it is free. Parents and their adult children also often hold title this way, as do unmarried couples.
Indeed, when one owner dies, full ownership does transfer automatically to the surviving owner without probate. But usually this just postpones probate. If the surviving owner dies without adding another owner (which often happens), or if both owners die at the same time, the property will almost certainly have to go through probate before it can go to the heirs.
There are other problems, too. When you add a co-owner, you lose some control. With real estate, all owners must sign to sell or refinance. If your co-owner disagrees with you, you could end up in court. If your co-owner is incapacitated, the court will probably get involved to protect your co-owner’s interest—even if the incapacitated owner is your spouse.
You also expose the property to your co-owner’s debts and obligations, and you could even lose your home to your co-owner’s creditors if the co-owner is successfully sued. There could also be gift or income tax problems if your co-owner is not your spouse.
Finally, because a will does not control jointly owned assets, you could disinherit your family when your co-owner inherits your share. Sadly, and all too often, children from a previous marriage are disinherited when a new spouse is the surviving owner.
Tenants in common. With this kind of ownership, each owner’s share will be distributed as directed in the owner’s will through probate. If there is no will, the property will go to the owner’s heirs.
Community property: Nine states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin) have a form of joint ownership between spouses commonly called community property (and Alaska has an opt-in community property law that allows this form of ownership if both parties agree). When you pass on, your share of community property automatically goes to your surviving spouse, unless your will says otherwise.
The problem with both tenants in common and community property is that you could find yourself with several new co-owners when your co-owner dies and the heirs inherit the property. Imagine how difficult it could be to get several owners to reach an agreement, especially if you are trying to sell or refinance the property.
You can also run into the other problems noted for joint tenants with right of survivorship (i.e., incapacity, lawsuits, etc.), but with several owners involved, your risks and problems are multiplied.
Tenants by the entirety. This form of joint ownership, available between spouses in some states, is similar to joint tenants with right of survivorship in that when one spouse passes on, the deceased spouse’s share automatically goes to the surviving spouse, even if the will says otherwise. So you have many of the same risks, including unintentional disinheriting and court interference if one spouse becomes incapacitated.
However, as tenants by the entirety, neither spouse can transfer his or her half to someone else without the other’s approval—something both joint tenants with right of survivorship and tenants in common can do.
Revocable living trust. When you have a living trust, the title of your real estate can be held in the name of the trustee of your trust. Usually you will be your own trustee, so you keep full control of the property. You can buy, sell, and refinance real estate just as you can when the property is not in your trust.
If you become incapacitated, the successor trustee you named when you set up your trust will be able to step in and act for you. Because the title is no longer in your individual name (or joint names if married), there will be no need for court interference. If you are married, you and your spouse can be co-trustees, in which case your successor trustee would step in only after you have both become incapacitated or have passed on.
Your successor trustee is legally obligated to follow the instructions you put in your trust. If you recover, your successor trustee simply steps aside and lets you resume control. When you pass on, the property will be distributed without probate according to the instructions in your trust, so you do not have to worry about unintentionally disinheriting someone.
SUMMARY: How you hold title to real estate should be given careful consideration. Check your titles and make any changes now while you can.