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Having your own home is one of life’s greatest achievements, and it’s something that you should be proud of.
But have you ever stopped to think about why having a title to your home is so important?
In this blog, we will explore the reasons why having a title to your home matters, the different ways you can hold a title, and how it can benefit you in the long run.
Understanding Your Deed and Title
A deed is a written document declaring a person’s legal ownership of a property, while a title refers to the concept of property ownership rights.
Here’s why the 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 a must! This determines the extent of control:
- You may have over your real estate
- How susceptible your property is to creditors, and
- What will happen to it upon your death
Below are some of the common ways in which real estate is owned.
Sole Ownership
One of the most common ways people own real estate is through sole ownership. As the sole legal 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. Real estate could be vulnerable to being taken to satisfy debts or creditors’ claims.
At the time of your death, the real estate will be distributed according to the instructions in your will (or trust). However, both documents must go through probate court in order to legally transfer ownership to your designated heirs—a process that can be lengthy, costly and public. In the event that the real estate is extremely valuable, this can be especially burdensome for your loved ones.
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 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.
The more co-owners of a property, the greater the risk of creditor issues. Should a co-owner owe money to a creditor, they may be able to force the sale of the real estate to satisfy their claim. Upon the death of a co-owner, their interest in the property will pass to the person designated in their will or, if no estate plan was prepared, to whoever is specified by state law. In either case, the transfer of ownership must be processed through the probate court.
Joint Tenancy
Also referred to as “joint tenancy with right of survivorship,” two or more people own equal and undivided shares in a certain piece of real estate. Upon the death of one of the co-owners, their interest is automatically transferred to the surviving individuals.
The remaining co-owners continue to own the property and have the authority to transfer their interest to another person; however, the new co-owner does not become a joint tenant with the right of survivorship, but rather a tenant in common, whose interest does not automatically pass to the other owners upon their death.
A potential disadvantage of joint tenancy is exposure to creditors. With multiple co-owners, any creditors of any of the joint tenants have the right to seek satisfaction of their claims through the co-tenant’s interests in the property.
If the creditor successfully forces a sale of the real estate, the other co-owners may be against it. However, one of the advantages of this form of ownership is that it eliminates the need for probate when ownership is transferred upon death. If you become the sole owner, you must consider the risks associated with owning real estate as an individual.
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 legal ownership.
Tax Benefits
Additionally, there are tax benefits that occur at their passing when the property is held as community property which includes a step-up in basis. Please check with a tax advisor on the pros and cons of 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 trust maker (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 on what type of trust is being used.
Revocable Trusts
If you put your real estate into a revocable trust, you will have the most flexibility to manage and use the property. By naming yourself as a trustee and beneficiary, you can easily retain control and access to the property. However, if the trust is set up for asset protection purposes, it must be an irrevocable trust and the selection of trustees and beneficiaries becomes more complex.
The primary benefit of transferring your real estate to a trust is that it avoids probate, since the trust, not you, is the owner and the trust can never die. The trust document will usually provide instructions for what happens to the real estate upon your death.
Additionally, transferring ownership of your home to a trust can also require bank approval in some cases, depending on whether the property has a mortgage.
Limited Liability Company
A limited liability company (LLC) is a legal entity that can own real estate. Instead of owning the real estate outright, 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 will 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 concerns 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.
Hermance Law is here to help you understand why the title to your real property matters.
Regardless of how you think you own your real estate, you must review your documents and confirm your understanding with an experienced estate planning attorney.
The title of your real estate can have a major impact on how your estate plan is structured. Incorrect titling can completely undo your intentions and render your estate plan ineffective.
Call our office today. As an added convenience for our clients, we are available to hold our meetings through video conferencing using zoom or by phone.