How Should You Hold The Title To Your Home?
I have many younger clients that have been renting and are now considering purchasing their first home. Some of them are motivated by the low interest rates, and others want more space after being cooped up in a small space during this pandemic.
One of the goals of choosing how to hold your home title is to avoid a situation where the ownership of your home is decided by the legal system, which is called probate. Some things to consider are why you are buying the property, how you are using it and what you want to happen to your ownership in the property after you pass away.
One of the most common forms of ownership is the Joint Tenancy With Right of Survivorship. This form of ownership provides everyone with equal property rights that pass on to the survivors in the event of an owner's death. The ownership cannot be divided up, and the interest in the deceased owner's property passes to the other surviving owners. This is the best way to hold the title if you want the ownership evenly divided, and only want one title for the property. Also, you must want the surviving owner to receive your share of the property when you die. This is not a good choice for clients that want heirs to have rights to the property as opposed to the surviving spouse. Sometimes in second marriages a spouse would like their share to go to their heirs as opposed to the surviving spouse.
Another common form of ownership is Tenancy in Common. This is good for clients that would like to buy property with several people and you want to be able to divide up the interest unequally perhaps based upon the amount of money each owner has put into the investment. Each owner has their own separate, legal interest in the property, and a right to possess the property. The rights do not automatically go to the other owners, and the interest either goes to the heirs or has to be determined in probate court. This is one reason why it is so important to have a will when you decide to purchase a home. This type of ownership is good if you want to own property with multiple owners and want to divide the interest unequally and to be able to sell each owner's interest separately. If you do not have a will, this is not a good idea since the court will determine how your interest passes after your death.
Sole ownership is another way to hold title to a property. This is where one homeowner owns all rights, title and interest to the property. A married person can hold the title "sole and separate" from a spouse, meaning that the spouse does not have any rights to the property. When the owner dies, the property passes to the heirs or goes through probate court to determine how it will be transferred. This is used sometimes in second marriages where one spouse has paid for the home, and wants the entire interest to be transferred to their children as opposed to the surviving spouse.
Real estate can also be held in a living trust. The trust specifies what happens to the interest in the property when one of the trustors dies. A living trust can provide the clearest way to state your intentions in your real estate that you own in the event of your death. The downside of using a living trust is that it costs money and needs an attorney to draft the document. Also, sometimes lenders require a copy of the trust document to ensure that there are no stipulations in the trust that may prevent them from collecting on the mortgage.
Another form of title vesting is Community Property with Rights of Survivorship. This type of vesting is only used for married couples. This type of titling is used when you are married and want equal ownership and where you do not want another owner to be able to sell your interest. This enables the heirs to half of the interest upon the death of one of the owners. This is not a good option if you are single or want to sell you ownership separately while you are alive. It is also not good if you do not have a will, since the probate court would have to determine how your interest gets transferred upon your death.
The way you hold title provides the guidance on what happens to a property should one or multiple owners pass away. It determines who gets profits from the sale of your home after all owners have died, and indicates what happens with the property in the event of the death of one owner. It may also prevent probate if the home is properly titled. It is possible to add heirs to the title before you die or have a trust prepared that details your last wishes.
When purchasing a home, it is important to consider you own unique situation. I work with many clients that are not married, and want to purchase a home with their significant other. In other cases, there are second marriages where the clients would like their interest to pass to their heirs instead of to the surviving spouse. Purchasing vacation properties with relatives presents it's own set of challenges. It is important to consult with your financial advisor and real estate attorney to determine the best option for you. Please contact me if you would like to schedule a call to discuss your concerns.
About the Author
Patti Hughes is a Chicago Fee-Only Financial Planner. Lake Life Wealth Advisory Group provides comprehensive and objective financial planning, retirement planning, and investment management to help clients organize, grow and protect their assets through life’s transitions. She is a fiduciary, and does not sell products or earn commissions, so she truly acts in the best interests of her clients.