When it comes to real estate, it all depends upon how you hold title to the property that determines whether or not you can leave it to who you want at your death. I have a client who came to me with his mother-in-law for assistance in establishing a care plan. Mother-in-law needed more medical care than son-in-law was able to provide in their home. While devising the plan, we discovered that the house was titled in the names of mother, daughter and son-in-law, as “joint tenants with rights of survivorship” instead of “tenants in common”. Why is that a significant difference? Because mother’s daughter and son-in-law’s wife had died the year before. Daughter's will left everything to her husband. However, the deed to the house trumped that will. Title to the house passed to mother and husband as joint owners. Not a happy situation for son-in-law who had paid all the expenses of that home after mother's initial investment - it was definitely not what the parties intended.
Here are the different ways you can hold title to real property and the significance of each:
Tenancy in common allows an owner the greatest flexibility to transfer the property as he or she wants. Each co-tenant in a tenancy in common has an interest in the property and is free to transfer this interest during life or by way of their estate plan at their death. Co-tenants can have different ownership interests; for example, three owners could own 5 percent, 35 percent and 60 percent of the property, respectively, as tenants in common. Each tenant can sever their relationship with the other tenants by conveying their interest to another party. This third party then becomes a tenant in common with the other owners. This would have been a better way for mother, daughter and son-in-law to have held title to the home they were buying since it would have allowed for an accurate representation of their undivided shares. Mother-in-law was only contributing the initial 20% down payment needed by daughter and her husband to obtain a mortgage the property.
Joint tenancy, on the other hand, must have equal ownership interests in the property. In the case of my clients, by titling the property as joint tenants with rights of survivorship, mother, daughter and her husband were each given a one-third undivided interest in the property without consideration of their actual contribution to the purchase of this property or how that might impact them in the future. Therefore, at daughter’s death, her interest immediately ceased to exist and mother and son-in-law became equal owners of the property. The only advantage that joint tenancy provided was the avoidance of probate at the death of a joint tenant which, in this case, was no advantage at all.
A disadvantage to both joint tenancy and tenancy in common is that creditors can attach the tenant's property to satisfy a debt. So, for example, if a co-tenant defaults on debts, his creditors can sue in a "partition proceeding" to have the property interests divided and the property sold, even over the other owners' objections.
Therefore, a third form of tenancy, available in Virginia as well as 24 other states is tenancy by the entirety (TBE). Available only to married couples, TBE offers a unique form of asset protection that tenancy in common and joint tenancy do not: the creditors of one spouse cannot attach the property or force its sale to recover debts unless both spouses consent. This form of ownership is somewhat difficult to explain as each spouse has 100% ownership. So strange is it even to attorneys that New Jersey Supreme Court Justice Joseph Weintraub described tenants by the entirety as a form of ownership that “rests upon the fiction of oneness of husband and wife. Neither owns a separate distinct interest in the fee; rather each and both as an entity own the entire interest. Neither takes anything by survivorship; there is nothing to pass because the survivor always had the entirety. To me the conception is quite incomprehensible”. This tenancy cannot be broken except by death or divorce since one tenant cannot convey interest on their own, unlike with the other tenancies. Upon the death of one spouse, interest automatically passes to the surviving spouse. This likely would have been the best way for my clients to have owned the home. Husband and wife could have held titled as tenants by the entirety with the valuable asset protection and mother-in-law could have loaned them the money they needed. The loan could have then been paid by an exchange of checks of equal value, i.e., a reimbursement for living expenses from mother (non taxable to recipients) and a loan repayment from daughter and son-in-law (tax on interest income to mother who likely was in the lower tax bracket anyway).
Living trusts. Transferring title of your property into your revocable living trust, (where the TBE property will retain its asset protection in Virginia) is the best of all worlds. Why? Because if the trust is the owner of the property, it allows the Trustmakers to control who gets the property at death. Keep in mind that a trust is a contract between husband and wife who, by creating the trust together, are pledging to one another how this asset will be distributed at the death of the survivor. With the trust as owner, no probate is required at any death as long as it remains in trust; probate is eventually inevitable with any other form of ownership.
Assisting a client with what might become a complex issue is just one of the many ways our estate planning law firm helps families create a plan that works for their unique situation. Register online for a complimentary consultation or register for our complimentary workshops on this topic.
Reference: Fox News (July 22, 2016) “You're Going to Die—Here Are the Best Ways to Deal with Your Home”