Understanding Your Deed

Here’s why title to your real property matters. Real estate can take on different forms of ownership depending upon the number of parties and the unique circumstances involved. Understanding how your real estate is owned, or “titled,” is necessary!  This determines the extent of control:

  • You may have over your real estate
  • How susceptible your property is to creditors
  • What will happen to it upon your death.

Below are some of the common ways in which real estate is owned.

Individually

One of the most common ways people own real estate is individually. As the sole owner, you have full control over the real estate. You can transfer it to anyone and can mortgage it. Should you have any creditor issues, the bankruptcy code offers some protections for personal residences. The real estate could be vulnerable to being taken to satisfy debts or creditors’ claims. Additionally, at your death, the real estate will be transferred to the individual(s) named in your will (or trust). According to state law, both will require probate court involvement to transfer ownership to your heirs. This can be time-consuming, public, and an expensive process for your loved ones. Especially if the real estate is very valuable.

Tenants in Common

When several people own real estate as tenants in common, the entire property is owned by the group. This means that no single person can claim ownership of a specific portion of it. Yet the ownership does not have to be equal. One person can own a 25% interest (i.e. “share”) while the other has a 75% ownership interest. Each co-owner is free to transfer or mortgage their interest as they wish.

However, the more co-owners, the higher the possibility for creditor issues. While creditors can only collect from the co-owner that owes them money, they may be able to force a sale of the real estate to satisfy their claim. Upon a co-owner’s passing, their ownership interest will transfer to whomever the co-owner has specified in the owner’s will or by state law if no estate plan was prepared. Both options require the real estate to go through the probate process to transfer ownership to the co-owner’s heirs.

Joint Tenancy

Also known as “joint tenancy with right of survivorship,” two or more individuals own an equal and undivided interest (share) in the real estate. When one of the owners dies, their interest automatically passes to the remaining co-owners. The survivor(s) continue to own the real estate. Each co-owner is able to transfer their interest to another person. However, the new co-owner does not become a joint tenant (with right of survivorship). Rather, a tenant in common (whose interest does not automatically transfer to the surviving owners upon their death) with the original co-owners.

One downside of joint tenancy is creditor exposure. Because there are multiple co-owners, creditors of any of the co-owners can go after the co-owner’s interest in the real estate to satisfy their debts or claims.

The creditor may be able to force a sale of the real estate, even though the other co-owners may be against it. As mentioned before, a benefit of this type of ownership is that ownership is transferred automatically at death, avoiding probate. If you become the sole owner, then you will face the issues associated with owning real estate individually.

Community Property

In California, married couples can take title to real property as community property. This type of ownership can apply to any real estate, not just the primary residence.

With right of survivorship

If this term is included on the title at a spouse’s death, the surviving spouse will automatically become the sole owner. This keeps the real estate and its value out of the probate proceedings. As the sole owner, the surviving spouse will face the issues associated with owning the real estate individually. Alternatively, if the term “with right of survivorship” is not on the deed, then the deceased spouse’s portion would be subject to the probate process to transfer ownership.

Tax Benefits

Additionally, there are tax benefits that occur at their passing when property is held as community property which includes a step-up in basis. Please check with a tax advisor on the pros and cons on taxes for how property is held.

In a Trust

Another option for real estate ownership is to transfer it to, or have it purchased in the name of a trust. As the trustmaker (or grantor), you can establish rules for the use of the real estate. You can also appoint a person to oversee the maintenance of the real estate while allowing others to enjoy it. This can sometimes be yourself. It is important to note that the control and benefits can vary depending upon what type of trust is being used.

Revocable Trusts

If the real estate is in a revocable trust, then you will have the utmost freedom to manage and use the real estate. Simply by naming yourself as a beneficiary and a trustee. But if it is in an irrevocable trust for asset protection purposes, the selection of the trustee and beneficiaries becomes more complicated.

A primary residence can be transferred to a trust with or without a mortgage. Other properties with a mortgage might require bank approval before it can be transferred to a trust. Avoiding probabte is one of the primary benefits of transferring ownership of your real estate to a trust is that at your death. This is because the trust, not you, is the owner, and the trust can never die. In most cases, the trust document will provide instructions about what will happen to the real estate upon your death.

Limited Liability Company

Another entity that can own real estate is a limited liability company (LLC). Instead of owning the real estate, you own a part of the LLC (known as a membership interest). That is what will need to be transferred upon your death according to the terms of an operating agreement or estate planning documents, or based on state law if there is no will or trust.

In the LLC operating agreement, you can also include rules instructing how the real estate is to be used and managed. It can also outline the rules pertaining to the membership interests in the LLC.

Benefits of LLCs

One of the major benefits of using an LLC is that it provides limited liability. If a lawsuit is filed based on a claim arising from the real estate, or if a creditor seeks to satisfy a claim, the only assets available to satisfy any judgments or creditors are those owned by the LLC. In many states, if you have personal creditor issues, the creditors are limited as to what they can reach inside the LLC to satisfy their claims.

The asset protection benefits of an LLC can vary depending on state or federal law, or your unique situation. If this is a concern for you, we encourage you to call us as soon as possible.

Give Us A Call Today If You Need Help To Make Sure Your Property is Set-up to Pass the Way You Want It.

We are here to help you understand why title to your real property matters. Regardless of how you think you own your real estate, it is important that you review your documents and confirm your understanding with an experienced attorney. The title of your real estate can play a large role in how your estate plan is set up. If your real estate is not titled properly, it can completely undo your intent for your estate planning. 

Call or text our office at (805) 518-9633 or click here to schedule a {Free} 15-Minute Phone Call.  As an added convenience for our clients, we are available to hold our meetings through video conferencing using zoom or by phone.