Why taking a title on property is not as simple as you think

Often in my estate planning practice, when someone is signing their documents, they will comment, “This is almost like buying a house!”

My standard refrain is, “Well, it should be. This is dealing with everything you own, not just your house.”

But the ubiquity of this comment goes to show exactly how much paperwork is involved in buying a house.

Unfortunately, that often means one of the most important documents in the stack of papers put in front of a homebuyer doesn’t get the attention it deserves — the grant deed giving you title to the property.

Why a title is important

How you take title to your home will dictate your rights and obligations and, quite possibly, will affect your loved ones’ property ownership rights.

And yet, often homebuyers just take title as the escrow officer has filled out the document, make a best guess, or ask their real estate agent, who may or may not know the particular legal issues of the buyer.

It’s important to understand your options in order to choose the best way for you to hold title.

Sole ownership

If you’re single, title can be in just your name followed by “an unmarried person.”

If you’re married but bought or inherited the property as your separate property, the title could be held in your name followed by “a married person as his [or her or their] sole and separate property.”

Often, if you’re a married person buying as “sole and separate property,” a title company will require your spouse to sign a quitclaim deed in your favor, in essence verifying the spouse has no claim to the property.

In either case — single or sole and separate property — the property belongs to you, and you are free to manage the property as you see fit, including future sales or transfers.

But, if you do hold title this way, be sure you have a power of attorney document appointing someone who can manage the property in the event of your incapacity, and a will that says who the property should be transferred to at your death. Even better, you should have a trust, but we’ll get to that.

Community property

In California, property acquired during a marriage generally is considered community property, and as such, each spouse has an undivided 50% interest in the property.

This means each spouse has the right to dispose of one-half of the property during their lifetime or at death.

Taking title simply as “husband and wife” or even “husband and wife as tenants in common” will not alter the right to dispose of your 50% as you see fit.

However, titling real property in this way could result in a probate proceeding to have a deceased spouses’ 50% share transferred to either the surviving spouse or another party named in the deceased spouse’s will or trust.

Instead, if you’ve taken title as “husband and wife as community property with right of survivorship,” 100% of the property will belong to the surviving spouse. That could be a good thing, if that’s what you meant.

If, however, you have children from different marriages or other beneficiaries who you mean to benefit from your share of the property, titling your property this way will make that impossible. The “right of survivorship” supersedes any designation in a will or trust, and any right of inheritance by intestacy.

Joint tenancy

If you own property with another person and “community property with right of survivorship” is not an option (either because the co-owner is not your spouse or the property is not community property), title as “joint tenants” may be an option.

“Joint tenancy” provides that if one joint tenant property owner dies, the property belongs to the surviving joint tenant(s).

Joint tenancy has some advantages, and even greater disadvantages.

Advantages

Joint tenancy has the advantage of simplicity — it doesn’t require a lawyer, it’s a simple transfer at death by filing an “affidavit of death of joint tenant,” which avoids probate, and there is a continuity of ownership.

However, there are many disadvantages of joint tenancy, particularly if the property wasn’t actually purchased by both parties, but instead, one name was put on title as a “joint tenant” for convenience’s sake.

I see this when a parent wishes to avoid probate and puts one child on title, trusting they will share the property with the parent’s other children.

Disadvantages

Joint tenancy assumes each tenant has an equal interest in the property. That also means a creditor of each tenant can go after that property to obtain payment on a debt, whether the debtor joint tenant paid for any of their interest or not.

Another significant disadvantage of joint tenancy is that other arrangements made by a joint tenant — through a will or a trust — will be void unless the joint tenancy is first voided.

For example, assume mom and son bought a property together and took title as joint tenants. Then, son marries and creates a will or a trust leaving his interest in the property to his spouse. If nothing is done to void the deed naming mom and son as joint tenants, at the son’s death, the property will go to mom, not the son’s spouse.

Another disadvantage of joint tenancy is that either joint tenant can break the joint tenancy, even against the wishes of the other, and thereby create a tenancy in common.

With tenants in common, each owner has separate interest in the property and can transfer their interest during lifetime or at death to anyone they like (barring any agreement with other tenants in common).

In the earlier example, if son breaks the joint tenancy, say by transferring his interest by a deed to his trust with his spouse, at his death that half interest will be owned by his trust and thus can be transferred to his spouse.

This is true even if mom paid more for the property, or has been making improvements, paying all property taxes and insurance, or other financial contributions on the assumption that her son (not his spouse) would benefit or she would receive 100% of the property if he pre-deceased her.

Mom may have a claim for some reimbursement, but that will be hashed out in court, which is probably not what anyone meant.

But what if son broke the joint tenancy with a transfer to his trust and then mom died first? Mom died owning a tenancy in common interest and now her interest will need to be transferred through a probate court proceeding, and her interest may or may not wind up with son, depending on whether mom had a spouse and how many other children she had.

Tenants in common

Title as tenants in common gives each co-owner an undivided interest in the property proportional to their contributions to the property.

Thus, co-owners may have different percentages of ownership, and each is free to transfer or sell their interest at any time and to anyone, unless there is a tenancy in common agreement defining the terms for such.

A creditor can only pursue the interest belonging to a debtor, and not the interest of the other tenants in common. However, there is no right of survivorship and thus, a tenant in common interest may require a probate proceeding unless a trust holds the interest.

How one takes title to real property has significant legal meaning and should be considered carefully.

Owning real estate in California also generally means your estate will likely be subject to probate unless you have a living trust in place. A trust can also avoid many of the disadvantages of other forms of title discussed herein. Thus, consider putting a trust in place and titling your assets in the name of your trust.

At any rate, always seek legal advice for legal documents like deeds to real property.

Teresa J. Rhyne is an attorney practicing in estate planning and trust administration in Riverside and Paso Robles, CA. She is also the #1 New York Times bestselling author of “The Dog Lived (and So Will I)” and “Poppy in The Wild.”  You can reach her at Teresa@trlawgroup.net