Pay Close Attention To The Title, It Matters
Whether you have recently purchased, inherited, received a gift of real estate, or owned real estate for decades, understanding how your real estate is currently owned (or “titled”) can help you understand the level of control and asset protection available to you, as well as what will happen to your real estate upon your death.
Ways to Own Real Estate
One of the most common ways people own real estate is individually, meaning the title of the property is in your name only. As the sole owner, you have full control over the real estate. You can transfer it to anyone and you can mortgage it. However, although the bankruptcy code offers some protections for personal residences, should you have creditor issues, the real estate you own individually could be vulnerable to being taken to pay your debts and satisfy creditors’ claims. Additionally, if you own real estate in your name individually, at your death, the real estate will be transferred to those individuals named in your will or according to state law, which will likely require probate court involvement. This can be a time-consuming, public, and 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 “titled” and owned by the group, meaning that no one person can claim ownership of a specific portion of it. Yet the ownership does not necessarily have to be equal. One person can own a 25% interest (i.e. share) while the other has a 75% ownership interest. Each owner is free to transfer or mortgage their interest as they wish. However, the more owners, the higher the possibility for creditor issues. Although creditors can only collect from the owner that owes them, they may be able to force a sale of the real estate to satisfy their claim against the indebted co-owner. Upon a co-owner’s passing, the ownership interest will transfer to whomever that co-owner has specified in the co-owner’s will or, alternatively, 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.
For this type of ownership, also called “joint tenancy with right of survivorship,” two or more individuals own an equal and undivided interest (i.e. share) in the real estate. When one of the owners dies, their interest automatically passes to the remaining joint tenants, and the survivor(s) continue to own the real estate. Each owner is able to transfer their interest to another person, but the new owner does not become a joint tenant but rather a tenant in common (whose interest does not automatically transfer to the surviving owners upon their death) with the original owners. One downside of joint tenancy is creditor exposure. Because there are multiple owners, creditors of any of the owners can go after the other owner’s interest in the real estate to satisfy their claims. The creditor may be able to force a sale of the real estate, even though the other 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. However, if you become the sole owner, then you will face the issues associated with owning real estate individually.
Tenancy by the Entireties
In some states, real estate received or purchased by spouses can be owned as tenants by the entirety. With the proper language in a deed, which clearly demonstrates the desire to own the real estate as tenants by the entirety, all individuals who are legally married at the time they receive the real estate are able to own it as tenants by the entirety. This type of ownership can apply to a primary residence and also other property. In states allowing tenancy by the entirety, spouses are considered one unit under this type of ownership, one spouse cannot transfer or mortgage the real estate without the other’s consent. However, this also means that one spouse’s creditor cannot go after the real estate that is owned as tenants by the entirety (with the possible exception of a federal tax lien) to satisfy the creditor’s claims. 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, but as the sole owner, the surviving spouse will face the issues associated with owning the real estate individually.
In a Trust
Another option for real estate ownership is to transfer it to or have it purchased by a trust. As the trustmaker, you can establish rules for the use of the real estate, appoint a person (sometimes yourself) to oversee the maintenance of the real estate while allowing others (sometimes yourself) to enjoy it. However, it is important to note that the control and benefits can vary depending upon what type of trust is being used. If the real estate is held in a revocable trust, then you will have the utmost freedom to manage and use the real estate if you appoint yourself as the trustee and name yourself as a beneficiary of the trust. But if it is held by an irrevocable trust for asset protection purposes, the selection of the trustee and beneficiaries becomes more complicated. If a piece of property is not your primary residence and has an associated mortgage, you may need the permission of the bank holding your mortgage before transferring the property to your trust (though your primary residence can be transferred with or without a mortgage and without the bank’s permission). One of the primary benefits of transferring ownership of your real estate to a trust is that at your death, the real estate does not have to go through the probate process. 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.
By a 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), and 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. In your LLC operating agreement, you can include rules instructing how the real estate is to be used and managed, as well as outline the rules pertaining to the membership interests in the LLC. 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 creditor issues personally, the creditors are limited as to what they can reach inside the LLC to satisfy their claims. It is important to note that 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.
We Are Here to Help
While many may think that the way you own your real estate (the “titling” of your real estate) is a one-and-done transaction, you need to periodically review how each piece of real estate is titled. If you have recently refinanced or plan to refinance a mortgage on a piece of real estate, it is crucial for an experienced attorney to examine your paperwork to ensure that the ownership of the property is not being changed, or if it is, that the changes will complement your estate planning goals.
Planning for real estate can be a complicated endeavor. Although we have discussed the control, asset protection, and transfer at death issues, there are additional factors that need to be considered to develop the optimal plan for your unique situation. Call St. Louis Estate Planning and Probate Lawyer John P. Fritz today so we can discuss ways to help protect you, your family, and your real estate.