Real estate can be owned in several ways. The form of ownership, or how your property is titled, can determine how much control you have over it, how vulnerable your property is to creditor claims and lawsuits, and what will happen to it at your death.
One of the most common ways people own real estate is as a sole owner. As the sole owner, you control the real estate. You can mortgage it or transfer it to anyone you choose while you are alive. However, your real estate could be exposed to creditors’ claims. At your death, your real estate will transfer to the beneficiaries named in your estate plan (or, if you have no plan, according to state law). If you do not have an estate plan (and rely instead on state law) or have a will-based plan, probate court involvement must transfer ownership to your heirs. Probate can be time-consuming, public, and expensive for your loved ones.
Tenants in common is another form of ownership in which multiple individuals own real estate together. Unlike other forms of ownership, when several people own real estate as tenants in common, the ownership interests held by everyone need not be equal. One person may own a 25 percent interest (also called a share), while the other owns a 75 percent interest. Each co-owner can transfer or mortgage their interest as they wish. However, the more co-owners there are, the greater the likelihood of creditor issues involving one or more of them. Although creditors can collect from only the co-owner who owes them money, they may force a sale of real estate to satisfy their claim. Upon a co-owner’s passing, their ownership interest transfers to whomever the co-owner has specified in their estate plan (or by state law if no estate plan was prepared). Both options require the property to go through the probate process to transfer ownership to the co-owner’s heirs.
In most states, joint tenancy is the same thing as joint tenancy with right of survivorship. Two or more individuals (joint tenants) each own an equal share in real estate, and each joint tenant can transfer their interest to another person (though doing so may end the joint tenancy and result in a tenancy in common). Unlike tenancy in common, joint tenancy with right of survivorship interests automatically pass to the surviving co-owners upon the death of any joint tenant, avoiding the probate process. One downside of joint tenancy is the exposure to creditors. Because there are multiple co-owners, creditors of any one of them can go after that co-owner’s interest in the real estate to satisfy their debts or claims. The creditor may also force a sale of real estate, even if the other co-owners oppose it.
In some states, spouses can own real estate as tenants by the entirety. Because spouses are considered one unit under tenancy by the entirety, one spouse can rarely transfer or mortgage the real estate without the other spouse’s consent. With some exceptions, one spouse’s creditor cannot go after real estate that is owned as tenants by the entirety to satisfy the creditor’s claims. At a spouse’s death, the surviving spouse automatically becomes the sole owner, which keeps the real estate and its value out of probate.
Another option for real estate ownership is to transfer it to, or have it purchased by, a trust. As the grantor, you can establish rules for use of the real estate, appoint a person (sometimes yourself) to oversee its maintenance, and allow others (sometimes yourself) to enjoy it. However, the control and benefits available to you can vary depending on what type of trust you use. If the real estate is held in a revocable trust that you created, you may manage and use the property however you see fit. If the Trust is irrevocable, the analysis becomes more complicated. While a primary residence, with or without a mortgage, can be transferred to a trust, other properties with a mortgage may first require bank approval before being transferred to a trust to ensure the transfer does not cause the mortgage to become due in full. An important benefit of transferring ownership of your real estate to a trust is that the property need not go through the probate process at your death; instead, the trust terms dictate how the property passes, and the transition happens outside the probate process.
Another entity that can own real estate is a limited liability company (LLC). Instead of you owning the real estate, you own a part of the LLC (known as a membership interest), which is transferred at your death according to the LLC operating agreement or your estate planning documents (or, if not addressed in the operating agreement or estate plan, based on state law). In the operating agreement, you can also include rules instructing how real estate is to be used and managed, and outline rules pertaining to the membership interests in the LLC. One major benefit of using an LLC is 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 typically those owned by LLC. In some states, if you have personal creditor issues, the creditors may not access the LLC to satisfy their claims against you. These asset protection benefits may vary depending on state or federal law and your unique situation. If this is a concern for you, we encourage you to call us as soon as possible.
Regardless of how you think you own your real estate and how it will transfer at your death, you should review your deed and estate plan and confirm your understanding with an experienced attorney. The title of your real estate can play a significant role in how your estate plan is set up and how your assets are ultimately distributed. If your real estate is not properly titled, it can undo your estate planning intent. Contact us today so we can review your title and ensure your estate plan protects your property for future generations.
