You are purchasing a home, and the escrow officer asks, “How do you want to hold title to the property?” In the context of your overall home purchase, this may seem like a small, inconsequential detail; however nothing could be further from the truth. A property can be owned by the same people, yet the manner in which title is held can drastically affect each owner’s rights during their lifetime and upon their death. Below is an overview of the common ways to hold title to real estate:
Tenancy in Common
Tenants in common are two or more owners, who may own equal or unequal percentages of the property as specified on the deed. Any co-owner may transfer his or her interest in the property to another individual. Upon a co-owner’s death, his or her interest in the property passes to the heirs or beneficiaries of that co-owner; the remaining co-owners retain their same percentage of ownership. Transferring property upon the death of a co-tenant requires a probate proceeding or another post-death transfer.
Tenancy in common is generally appropriate when the co-owners want to leave their share of the property to someone other than the other co-tenants, or want to own the property in unequal shares.
Joint Tenancy
Joint tenants are two or more owners who must own equal shares of the property. Upon a co-owner’s death, the decedent’s share of the property transfers to the surviving joint tenants, not to his or her heirs or beneficiaries. Transferring property upon the death of a joint tenant does not require a probate proceeding, but will require certain forms to be filed and a new deed to be recorded.
Joint tenancy is generally favored when owners want the property to transfer automatically to the remaining co-owners upon death, and want to own the property in equal shares.
Community Property
Community property exists for married couples or registered domestic partners, and only exists in some states. With community property, the surviving spouse receives a “step-up in basis” when the first spouse dies. This means that the basis value of the property is raised to the fair market value on the date of death of the first spouse. This can be a huge advantage to couples who may have bought their property for a much lower value than present values.
Holding property as community property does not guarantee the property to be distributed to the surviving spouse or partner however. A person can transfer their half of community property to someone else. To avoid that, property can be held as “Community Property With Right of Survivorship”, which not only allows for a step-up in basis, but also acts like a joint tenancy with an automatic right of survivorship between spouses or partners.
Community property is only accumulated after the date of marriage, therefore all property acquired after marriage is presumed to be community property in California. All property acquired by a spouse before marriage is the separate property of that spouse. If a spouse owning separate property wants to keep it as separate property, a Prenuptial Agreement would be best. The Prenuptial Agreement can set forth the couple’s property and what will stay separate property during, or after, the marriage. Alternatively, a couple can execute a Marital Property Agreement, which transmutes property from separate property to community property. Either way, a written agreement with the property details, signed by both spouses, is the best way to make sure that the couple’s property is treated correctly.
Living Trusts
The above methods of taking title apply to properties with multiple owners. However, even sole owners, for whom the above methods are inapplicable, face an important choice when purchasing property. Whether a sole owner, or multiple co-owners, everyone has the option of holding title through a living trust, which avoids probate upon the property owner’s death. Once your living trust is established, the property can be transferred to you, as trustee of the living trust. The trust document names the successor trustee, who will manage your affairs upon your death, and beneficiaries who will receive the property. With a living trust, the property can be transferred to your beneficiaries quickly and economically, by avoiding the probate courts altogether. Because you remain as trustee of your living trust during your lifetime, you retain sole control of your property.
Use of LLCs for Property
Holding title to a property within a Limited Liability Company can provide an extra layer of liability protection for the owners. When combined with proper insurance, such an entity can prove very beneficial for property owners with multiple assets.
LLCs can be especially helpful for non-married persons owning property together for other reasons. The LLC Operating Agreement can set forth a sort of “tenancy agreement” for the parties, including agreements concerning paying for repairs, choosing to do maintenance, and determining what happens if one of the owners passes away. These agreements – whether within an LLC or just a written agreement between owners – are very advantageous, as they can avoid arguments between the owners and can save time and money down the road.
How you hold title has lasting ramifications on you, your family and the co-owners of the property. Title transfers can affect property taxes, capital gains taxes and estate taxes. If the property is not titled in such a way that probate can be avoided, your heirs will be subject to a lengthy, costly, and very public probate court proceeding. By consulting an experienced real estate attorney, you can ensure your rights – and those of your loved ones – are fully protected.