Why Title Matters
Why Title 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 because this determines the extent of control you 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.
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. However, should you have creditor issues, 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) or according to California’s intestacy law, both of which will require probate court involvement to transfer ownership to your heirs. This can be a time-consuming, public, and expensive process for your loved ones (especially if the real estate is very valuable). With very few exceptions, we recommend our clients not hold title to real property individually.
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% 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 issues. Although creditors can only collect from the co-owner that owes them money, under certain circumstances 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 California’s intestacy statute 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. It is generally very good advice that each of the co-tenant’s interest should be held through their trust to avoid probate.
For this type of ownership, 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, and the survivor(s) continue to own the real estate. Each co-owner is able to transfer their interest to another person, but the new co-owner does not become a joint tenant (with right of survivorship) but 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. However, if you become the sole owner, then you will face the issues associated with owning real estate individually.
In a Trust
In California, the preferred option for real estate ownership is usually to transfer it to or have it purchased by a trust. As the grantor, 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 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. But if it is in an irrevocable trust for asset protection purposes, the selection of the trustee and beneficiaries becomes more complicated. While a primary residence can be transferred to a trust with or without a mortgage, other properties with a mortgage might first require bank approval before it can be transferred to a trust. 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 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, 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 personal creditor issues, 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.
One significant downside to holding real property this way is that when a change in control of the LLC ownership interest occurs, the property tax basis of the property is very likely to be reassessed. For properties that have been owned for many years and have a low basis under Proposition 13, this can represent a major drawback to owning property this way.
Give Us A Call Today!
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, and if your real estate is not titled properly, it can completely undo your intent for your estate planning. Give us a call today so we can review your deeds and create an estate plan that will p