How you hold title to, that is, the ownership of, your assets is important. If something goes wrong and one spouse or partner is sued professionally, how you and your spouse or partner own your home can mean the difference between having to sell it to pay off a judgment, and being allowed to live in it.
Here are some of the more common ways to hold title to property:
Individual. If you’re a single person, your options for holding title to your home are rather limited. You may hold title to your property as an individual, or be the beneficiary of a living trust, which is holds the title. In a few states, you may hold title in a land trust.
Joint tenancy. Joint tenancy with rights of survivorship is the most common way married couples hold property. You each own the property as a whole. If you or your spouse dies, the deceased person’s share in the property is immediately transferred to the surviving spouse. You share and share alike in the entire property. This type of tenancy is only for married couples.
Tenancy in common. Tenancy in common allows each party to own a piece of the property separately. For example, you may own 40 percent and your spouse or partner may own 40 percent and your parents may own 20 percent, but you may each use and enjoy the whole property. You cannot be restricted to just the 40 percent share that you own. And, you may sell your share of the property to anyone you choose, as thought you were selling stock in a corporation. Tenancy in common is available to married couples or unmarried partners.
Tenancy by the entirety. Tenancy by the entirety is similar to joint tenancy with rights of survivorship. But both spouses in the marriage must agree to the title arrangement before the property is subject to one spouse’s creditors. Neither spouse on his or her own may do anything that would create a claim or lien on the marital property, and as long as the couple is married, and use the home as their primary residence, the interest of the couple is protected. If one spouse is sued, creditors would have to wait until the marriage is severed, the other spouse consents to the claim, or the property is sold to get the cash from the home.
Here are some less common ways to hold title to property:
Land trust. A land trust is a legal creation in which the sole asset in the trust is the property you are buying. You are the beneficiary of the trust. At one time, a land trust might have been used to obscure the identity of the beneficiary. Today, that veil has been lifted. If permitted in your state, and few do, land trusts are available to individuals, two or more buyers, and married couples. Children may also be the beneficiaries of a land trust, but the trust must be structured carefully.
Qualified personal residence trust. This is an estate-planning move that allows you to discount the future value of a home and save gift taxes if you give the property away while you’re alive or estate taxes if you leave it to your heirs. You set the term of the trust and you place your home into it. You’re allowed to live in the home for the term of the trust. The beneficiaries of the trust (your heirs) will receive the home when the term of the trust expires.
Living trust. A revocable living trust is one way to pass assets from one generation to another and avoid probate. However, they aren’t designed to help you minimize estate taxes. (For that you need an irrevocable trust.) You set up the living trust, and then transfer assets, such as your home or stocks, into the trust. You may name beneficiaries and leave a list of instructions for the trustee who will administer the trust. For many people, trusts take the place of wills. Also, living trusts aren’t public documents, so the element of privacy is appealing.
Family limited partnerships. By creating a partnership, parents can pass along pieces of their property to their children (or anyone else) by making them small limited partners of a partnership that owns the property. Limited partners don’t manage the property or have an active role in it and that can discount the value of their share of ownership, lowering estate or gift taxes when the property is transferred.
If you’re uncertain about the best way to hold title to your property, and how ownership will affect your estate, talk to a real estate attorney, financial planner or accountant about the ins and outs of each type of ownership. There may be some very real reasons to go one way or another and you should understand each option thoroughly before you close on your home.