Real estate can take on different forms of ownership, and understanding how your real estate is owned, or “titled,” can help you determine how much control you have over your asset. You can better understand how susceptible your property is to creditors, and what will happen to it upon your death. Below are some common ways in which real estate is owned.
One of the most common ways people own real estate is individually. In this case, the sole owner has full control over the real estate. You can transfer it to anyone and mortgage it. However, should you have creditor issues, the real estate could be 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) or according to state law, which, if you plan with a Will, then requires a time-consuming, public, and expensive probate court involvement to transfer ownership to your heirs.
Tenants in Common
When several people own real estate as tenants in common, the entire property is owned by the group, meaning that no one 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% ownership 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. Although 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. If a co-owner dies, their ownership interest will transfer to whoever the co-owner has specified in a will or by state law if no estate plan was prepared. Both options require the real estate to go through the probate process.
In joint tenancy, also known as “joint tenancy with right of survivorship,” two or more individuals own an equal share or interest in the real estate. When one of the owners dies, their interest automatically passes to the remaining co-owners, and the survivor(s) continues to own the real estate. Each co-owner can transfer their interest to another person, but the new co-owner does not become a joint tenant (with right of survivorship). Instead, this person becomes a tenant in common with the original co-owners. Joint tenancy can expose the owners to creditors; because there are multiple co-owners, creditors of any of the co-owners can go after the co-owner’s interest to satisfy debts. The creditor may be able to force a sale of the real estate, even if the other co-owners are against it. At death, ownership of this type is transferred automatically, avoiding probate.
Tenancy by the Entireties
In some states, real estate purchased by spouses can be owned as tenants by the entirety. Although some state laws still refer to the parties as husband and wife, with the proper language in a deed, all individuals who are legally married when they receive the real estate are able to own it as tenants by the entirety. This type of ownership can apply to any real estate, not just the primary residence (though this is of course state law specific). Because spouses are considered one unit, one spouse cannot transfer or mortgage the real estate without the other’s consent, but this also means that a creditor of one spouse cannot go after the real estate that is owned by both partners. 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 the now sole owner will face ownership issues as an individual.
In a Trust
Real estate can also be purchased by a trust. As the trustmaker, you can establish rules for the use of the real estate, and you may appoint a person to oversee the maintenance of the real estate while allowing others to enjoy it. The control and benefit of this type of ownership vary depending on what type of trust is being used. If the real estate is in a revocable trust, then you will have total freedom to manage and use the real estate if you appoint yourself as the trustee and beneficiary. But if you use an irrevocable trust for asset protection purposes, the selection of the trustee and beneficiaries becomes more complicated. While they can transfer a primary residence to a trust with or without a mortgage, other properties with a mortgage can require bank approval before being transferred to a trust. At your death, the real estate will not go through the probate process because the trust, not you, is the owner of the real estate.
By a Limited Liability Company
You can also own real estate using 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. In the LLC operating agreement, you can include rules instructing how the real estate is to be used and managed, as well as outline the rules involving the membership interests in the LLC. One of the major benefits of an LLC is that it provides limited liability. If a lawsuit is filed, 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 will vary depending on your state and your specific situation.
Make an appointment with our team today
Regardless of how you own your real estate, you need to review how things are structured and confirm your understanding with an experienced attorney. The title of your real estate can influence how your estate plan is set up, and if your real estate is not titled properly, it can undermine your estate planning goals. Contact us today; we can review your deeds and create an estate plan that will protect your property for future generations.