For many people, real property, including their home, is a big part of their overall net worth. How the home and other pieces of real property is titled deserves careful consideration. Real estate, also referred to as real property, constitutes the land and any structure on the land. Real estate can be commercial or residentially owned. Ultimately how you hold a property title has far-reaching consequences for liability, and when it comes time for sale or the bequeathing of it as an inheritable asset after you pass away.
The title is a document that lists the legal owner(s) of a piece of real estate. The title for real property, by law, must be transferred if the asset is sold or inherited and must be clear for the title transfer to take place. A clear title is free of liens or any other encumbrance posing a threat to proper ownership. An encumbrance is a problem regarding the property, such as if a neighbor's fence was accidently built on your land. The most common types of real estate titles are joint tenancy, tenancy in common, tenants by the entirety, and sole ownership. Less common property ownership titles are corporate, partnership, and trust ownership.
Individual name or sole ownership allows for a single person to hold title, even if you are married. If the person becomes mentally or physically incapacitated due to injury or illness, a spouse or family member typically will need to conduct business with regards to your property. Unless the property is titled in your living trust or there is a good, comprehensive general durable power of attorney in place, your family member may not be able to do business transactions like refinancing or changing lines of credit, and they may be unable to act until a court appoints someone to act on your behalf. Many people assume if they have a Last Will & Testament it will address the problem, yet a Will does not go into effect until after you die and is not in effect if you become incapacitated.
Joint tenants (some may have rights of survivorship) occur when two or more people hold the title to real estate jointly. This type of title is widespread among but not exclusive to married couples. Unmarried couples may also hold joint tenant title as can parents and their adult children. In the case of a couple, the death of one automatically transfers full ownership to the surviving owner without probate. However, probate is more than likely just to be postponed. In the event the surviving owner dies without adding another owner, or if both owners die at the same time, probate is almost certain to occur before the property can go to the heirs.
Being a co-owner means that to sell, refinance, or take any action to the property, both owners must agree to the business action. If there is disagreement or in the event your co-owner becomes incapacitated, the court may become involved to resolve the disagreement or to protect the interest of the one who has become incapacitated. Court involvement may occur even in the event the incapacitated owner is your spouse. In the case a co-owner is not a spouse, there can be income tax or gift tax problems. A Will does not control any jointly owned assets, and you may mistakenly disinherit your family when your co-owner inherits your share, particularly in the case of second marriages with children from a previous union.
Tenants in common (TIC) allows for two or more people to hold title to real estate with equal rights during their lifetime to enjoy the property. A tenant in common title creates shares of ownership, and those shares will be distributed as directed in a Will upon an owner's death. In the absence of a Will, the property goes to the heirs of the owner. As a tenant in common individually holds title for a respective part of the property, they are at liberty to dispose of said owned property or encumber it at will. Owners of their respective shares are permitted to use their portion of the property as collateral or in financial transactions.
Tenants by entirety (TBE) are only permissible if the owners are legally married. This title, for purposes of ownership, treats the couple as one person for legal action and interpretation. Upon the death of one person, the TBE title is transferred in its entirety to the other spouse. This is advantageous as no legal action is necessary upon the death of one's spouse. It does not require a will and probate is unnecessary.
Corporate ownership allows a legal entity, a company owned by shareholders, to hold title to property. Partnership Owners can own real estate as a partnership. This title constitutes two or more people who transact business for profit as co-owners. There are also limited partnerships where an investor has limited liability because they do not make management decisions regarding business transactions of the property. In the case of limited liability, a singular general partner will typically be responsible for making business decisions on behalf of the identified limited partners.
Trust ownership, most often in the format of a revocable living trust, is a legal entity that owns the real property, which is managed by you as the trustee on behalf of yourself. In the event you become incapacitated, your named successor trustee can seamlessly take control of your trust without court interference. A successor trustee is legally obligated to follow the instructions put forth in your trust. If you recover from incapacitation, you resume control of your trust. If you were to die, the property would be distributed according to your trust instructions and without probate.
Methods of holding and owning title to real estate property are determined by state law and, as such, must be considered when researching and determining the best method to acquire and hold title to real property where you live. Depending on the complexity of your situation, assessing the best way to title your real estate may require professional real estate, legal and tax guidance. As part of my elder law and estate planning practice in Troy, Michigan, I help my clients determine the best way to hold title to property, and whether a trust would be beneficial. Feel free to contact me if I can be of assistance in your estate planning.