Before you buy your home, you should think about how to protect it. Purchasing adequate homeowner’s insurance is one way to protect your home, but you should also think about how you’re going to hold title to your new home.
Too often, the way in which title is held is an afterthought. Many buyers aren’t even asked what their preference is. If you’re married, you’re often automatically given joint tenancy with rights of survivorship. If you’re single, you hold the property in your own name.
But there are other ways of holding title that might help you in certain situations.
For example, should something go wrong with either your business, or your spouse’s business, and you or your spouse get sued, the recorded ownership of your home can mean the difference between the house’s being sold to pay off a judgment, and your being allowed to live there until you choose to sell.
Unless estate taxes get changed any time soon, your ownership of your primary residence, as well as other property you own, can have important estate tax considerations as well.
Here are some of the ways you may hold title to your home and the effect each may have on your estate.
Individuals. If you’re single, your options for holding title to your home are rather limited. You may hold title to your property as an individual, or in one of a variety of trusts. If you’re an individual, the best way to avoid probate (and expensive probate fees) is to put your property in a trust. You may also be able to create a limited liability company or a corporation to hold the property. Check with your tax or estate attorney for details.
Joint Tenancy with Rights of Survivorship. This is the most common way married couples hold property, but two nonrelated individuals may also own a piece of property as joint tenants. The nice thing about this type of ownership, is if something happens, your share in the property is immediately transferred to your surviving spouse or partner upon your death.
There are issues to consider if you’re concerned about estate taxes. Upon your death, your spouse or partner will inherit your half at a stepped-up basis. Your half of the property would be revalued as of the date you die and your spouse or partner would inherit it at the current value. If you’re unmarried, the property may be divided based on how much each partner contributed to the purchase of the property.
Tenancy in Common. This form of ownership allows each person to own his or her piece of the same property separately. For example, you may own 40 percent, and your partner may own 60 percent. But you get to use 100 percent of the property. You may also sell your share in the property to anyone you choose, just as if you were selling stock in a corporation. Typically, this is not a choice used by married couples, since your share of the property goes through probate before it is distributed to your spouse or heirs.
Tenancy by the Entirety. Available only to married couples, in some states, this form of ownership is similar to joint tenancy. But the key difference is this: If you own property as tenants by the entirety, both spouses must agree before the property becomes subject to one spouse’s creditors. So if one spouse goes bankrupt, his or her creditors couldn’t force the sale of a home held as tenancy by the entirety if the other spouse refused.
Trusts. The only way you can avoid probate (other than holding title as joint tenants with rights of survivorship or tenancy by the entirety) is to put your property into one of a variety of trusts. Why? Because the trust names the chain of ownership of a property going forward. But be aware that trusts will have an impact on your estate and if not set up carefully, in accordance with state law, the benefits could unravel at a crucial time.
With a land trust (a type of trust available in very few states), the sole asset in the trust is the property you are buying, and you are the beneficiary of the trust. While a land trust was once used to obscure ownership, today, it’s a limited, but simple, vehicle for avoiding probate.
Qualified Personal Resident Trusts (QPRT) allow you to discount the future value of your primary or vacation residence and possibly save on the gift and estate taxes you’d otherwise owe. You set the term of the trust and place your home into it. You can live in the home for the term of the trust, and the beneficiaries (your heirs) will receive the home when the term of the trust expires.
The benefit of a QPRT is that the IRS allows you to discount the future value of the house according to a preset schedule, and pay less in gift and estate taxes. But if you die before the QPRT term expires, the property reverts back to you.
A revocable living trust is another way to pass assets from one generation to another and avoid probate. But it does not offer any way to lower your estate tax burden (if you have one.)
If you are trying to determine which way to hold title to your property, talk to your real estate attorney. And estate attorney can guide you when it comes to setting up a trust and explaining the tax consequences of such a move.