After searching for months, finally finding the perfect home and qualifying for a mortgage, as the documents for your new home are being prepared, you’re asked, “How would you like to take title to your new home?”
Your answer to that seemingly innocent question is extremely important because the costly results of your decision might not be known for many years. The wrong choice could prove to be an expensive mistake. With the help of your attorney, here are your choices of the most widely used realty ownership methods and their consequences:
– Sole ownership. If you are not married, your title-holding methods are limited. Sole ownership, also called ownership in severalty, means you are the only title holder. But another alternative to consider is taking title in a living trust, to be explained later.
However, if you are married but wish to take title to real estate as your separate property, if you take title in sole ownership, your spouse might automatically acquire a spousal interest. But your spouse can renounce his or her interest by signing a quit claim deed. This is often done, for example, where the husband is in the real estate or construction business and desires to take title alone for business purposes.
– Joint tenancy with right of survivorship. Between husbands and wives, the most popular home ownership method is joint tenancy with right of survivorship. This method can be used by any group of two or more co-owners, but it most often is used by close relatives.
The special feature of this method is when one joint tenant dies, the surviving joint tenant(s) automatically receives the deceased joint tenant’s share without any probate costs or delays. To clear the title of the deceased’s name, usually only an affidavit of survivorship and a certified copy of the death certificate need to be recorded.
Joint tenancy property is not subject to a deceased joint tenant’s will. This effectively disinherits relatives named in the deceased’s will.
In some states, a special form of joint tenancy, tenancy by the entireties, is allowed between husbands and wives. In a tenancy by the entireties, neither spouse can convey ownership during his or her lifetime without the other spouse’s consent.
– Tenants in common. If two or more co-owners acquire realty together, and each wishes to retain control over their share, they often take title as tenants in common. There is no survivorship feature.
Tenants in common can pass their share of the property by their wills to whomever they wish. This benefit can be especially important in second marriages where each spouse wishes to will their half to children from a previous marriage.
A unique feature of tenancy in common is the owners do not have to own equal shares. To illustrate, one tenant in common can own 50 percent of the property, another 40 percent, and another 10 percent. However, each tenant in common is entitled to possession of the entire property regardless of their ownership share. The right of partition, as explained above, is available to tenants in common.
– Community property. In the community property states of California, Nevada, Louisiana, Wisconsin, Texas, Arizona, Washington, Idaho and New Mexico, married spouses can hold title as community property. Each spouse then owns one-half of the property and that half can be passed upon death by will.
A major community property advantage is the new stepped-up basis to market value a surviving spouse receives in the entire property if the deceased spouse left their half to the surviving spouse.
To illustrate, suppose husband and wife paid $50,000 for their community property home. By the time the husband dies many years later, the house has appreciated to $200,000 market value. If he left his half of the house to his surviving wife, her new adjusted cost basis is the $200,000 market value on the date of death. Had they held title as tenants in common, she would get a $100,000 basis for the inherited half plus her $25,000 basis for her original half, for only a $125,000 total. If she sells the house for $200,000, then she has a $75,000 taxable gain, whereas no gain exists if title was held as community property.
– Living trust. Both sole owners and co-owners can hold title to their home and other real estate in a revocable, inter vivos living trust. This title-holding method provides for automatic property disposition upon death according to the trust terms without probate costs or delays.
Until death, the property owner(s) retains complete control over the living trust property as trustor, trustee and beneficiary. Should the creator of the trust, called the trustor, become incompetent and unable to manage the property, the named alternate trustee takes over without the need for a court-appointed conservator. The alternate trustee might be a spouse or perhaps an adult offspring.
When the trustor dies, then the trust becomes irrevocable. The trust assets then automatically pass according to the terms of the living trust, without probate costs or delays, to whomever is designated. Until the trustor dies, the living trust can be changed and the properties in the living trust can be freely bought, sold and refinanced.
An additional living trust benefit is privacy. When a person dies and their will is probated, it becomes public knowledge along with all their assets.
But a living trust and its assets always remain private.
– Other ownership methods. For special situations, other title- holding methods such as a partnerships, corporation, and irrevocable trusts might be appropriate. Before taking title to your home or other real estate, please consult a real estate or estate planning attorney.
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Please note: Real estate laws differ from place to place, and laws of your area should be checked before making decisions on real estate problems. Letters should be addressed to Tribune Real Estate Features Service, P.O. Box 280038, San Francisco, Calif. 94128.
