One of the most important decisions that needs to be made at closing is how you choose to hold title. It determines how you will be insured, but it can also have significant legal and tax consequences.
For example, there is an option available to married couples that provides protection from creditors in the event of the death of one of the spouses. There is also an option that affords a “right of survivorship” between unrelated owners. If not set up correctly, how you hold title can create unanticipated complications when you decide to sell or transfer the title to someone else.
Several years ago a married couple decided to take title to their house as “Joint Tenants” or joint owners. The husband had children from a previous marriage and intended to will his share of the property to his children. He was not aware that when one Joint Tenant dies, his or her interest automatically passes to the surviving owner and by law cannot be willed to anyone else. Fortunately, the couple discovered this stipulation before closing, and took title instead as “Tenants in Common.”
There are six common ways to hold title, and the first three are reserved exclusively for married couples.
Tenancy by the Entirety
This is a special type of joint tenancy with rights of survivorship that is recognized between married couples including same-sex marriages in Alaska, Arkansas, Delaware, Florida, Hawaii,Illinois, Indiana, Kentucky. Maryland, Massachusetts, Michigan, Mississippi, Missouri, New Jersey, New York, North Carolina,Oklahoma, Oregon,Pennsylvania, Rhode Island, Tennessee, Vermont, Virginia, Tennessee and Wyoming. In order to form a Tenancy by the Entirety, a couple must acquire the property at the same time and the title to the property must be granted by the same instrument. Additionally, both partners must share the same interest in the property and must hold equal rights to possession of the property.
Property held under Tenancy by the Entirety cannot be sold, mortgaged, or used as collateral by one spouse without the consent of the other spouse. It allows spouses to own property as a single legal entity, offering protection to a surviving spouse from creditors of the deceased spouse. Tenancy by the Entirety cannot be used in Community Property states.
Community property is a legal distinction that determines ownership of a married couple’s assets and is available in Arizona, California, Idaho, Louisiana,Nevada, New Mexico, Texas, Washington and Wisconsin. Property held in this manner does not have to pass through probate when one spouse dies, and the title passes directly to the other spouse. It is similar to holding title in Joint Tenancy, but it is limited to married couples or registered domestic partners. Although Alaska, Florida, Kentucky, South Dakota and Tennessee are not a community property states, they have an opt-in community property law. Spouses can designate their property by community property standards by way of a property agreement to by establishing a community property trust.
Community Property With Right of Survivorship
In Community Property ownership all assets obtained during the marriage are owned 50/50 but any assets acquired by a spouse prior to the marriage still belongs to that spouse alone. If the asset-owing spouse dies, the asset (a house) would not be inherited by their surviving spouse unless specifically stated in a will. To avoid probate or other problems, coupes can instead take title as Community Property with the Right of Survivorship. This is a fairly new designation of ownership and it ensures that when one spouse dies, their half of a shared community property goes directly to the other spouse—and to no one else. Survivorship with Community Property is only available to married couples or registered domestic partners in these sates: Alaska, Arizona, California, Idaho, Nevada, and Wisconsin. To turn property into Right of Survivorship community property you simply put the words on the title deed. Spouses are free to change their minds and remove the survivorship provision later, but it must be done in writing in a new deed.
Sole and Separate property
Sole and separate property means that no one else has any interest in the property. If you are married and want to take title this way, you should record a quitclaim deed from your spouse to yourself so that no “community interest” could be claimed at a later date. This applies only in community property states.
The distinguishing characteristic of Joint Tenancy is the right of survivorship. If one of the joint tenants dies, his or her interest automatically passes to the surviving party or parties instead of being tied up in lengthy probate proceedings. Joint tenants own an undivided equal interest in the property and have the same rights to the use it. For example, neither co-tenant can distinguish which portion of the property he or she owns. Once a joint tenancy has been created, no joint tenant can sell his or her interest without terminating the joint tenancy. If either sells his or her interest, the buyer comes in as a tenant in common rather than as a joint tenant.
Tenancy in Common
When two or more people buy property together, whether their shares are equal or unequal, they can hold the property as Tenants in Common.Tenancy in Common is so standard as a form of ownership for unrelated buyers that it is generally presumed to be the way they hold title if nothing else appears to the contrary. The shares are also presumed to be equal, unless they are listed otherwise on the deed, and each of the tenants has equal rights of possession. Each co-tenant owns an undivided interest, but unlike a Joint Tenancy, these interests need not be equal, may arise from different conveyances, and do so at different times.
At some point, you may decide that you want to change the way you hold title to, for example, place the property in trust for a child or to
gift property to adult children. It can be a relatively simple matter to change the form of ownership. Single people can use a Quitclaim Deed to transfer the property from themselves to themselves in the new category in which they wish to hold title. Married couples would follow the same procedure using an inter-spousal deed.
Alternate Ways to Hold Title
Other ways to hold title (often used for estate planning purposes) are revocable trusts or living trusts where of one of the spouses has part ownership of the home among two trusts, or variations of these types of ownership. Limited Liability Partnerships (LLC) can be an option in other circumstances.
Depending on your area’s regulations, you may need to use particular wording in your deed, so it is a good idea to get the advice of a professional or lawyer first. You will need to get the deed acknowledged before a notary public, and then have it recorded at the clerk’s land records office.