Why Does It Matter How Property Is Titled?The manner in which jointly held property is titled is not something most people think much about – but they should. The type of joint title you choose could impact your own rights to the property. Furthermore, it can also potentially subject your interest in the property to unnecessary risks. In most states, the title takes precedence over other transfer methods. This means that if there is a conflict between a gift made in a Will and the manner in which property is titled, the title wins.
Types of Joint Ownership of Real PropertyJoint ownership of real property is governed by state law. This means each state decides what types of joint ownership will be recognized within the state. At the time you purchase real property with an additional owner, you should be asked which type of joint title you plan to use. Never rely on the title company to create the right type of ownership. They typically only prepare the most simplistic deed/title. This may not reflect the manner in which you plan to hold the property.
Tenancy in CommonTenancy in common is the default type of joint ownership in most states. In other words, if the ownership instrument is silent with regard to the type of joint ownership, the law will presume you hold it as tenants in common. With a tenancy in common, each owner owns a separate fractional share of undivided property. In addition, there is no limit to the number of owners. Furthermore, owners can own differing shares of the property. For example, you might own property with your two adult children. You could own 50 percent of the property and they each own 25 percent. As a tenant in common you can sell, mortgage, transfer, or assign your share of the property; all of this can be done without the consent of the other owners. Additionally, your interest in the property will become part of your probate estate after your death. Both of these features can put your interest in the property at risk.
Joint Tenancy with Rights of SurvivorshipProperty can be held as joint tenants with or without rights of survivorship. The title instrument must specifically state that rights of survivorship exist. Usually, the most important benefit to holding property as joint tenants with rights of survivorship (JTWRS) is that your interest in the property does not become part of your probate estate after your death. Instead, your interest passes automatically to the surviving owner(s) outside of the probate process. Along with making it much easier to pass your ownership interest to loved ones, this feature also means the value of your interest in the property is not included for federal gift and estate tax purposes. However, there are downsides to holding property as JTWRS. One is that an owner cannot sell, transfer, mortgage, or otherwise encumber the property without the consent of the other owner(s). Another disadvantage is that creditors of one owner can still reach the property to pay off debts of another owner.
Community PropertyFor married couples, community propert is the normal default type of joint ownership in California. With community property, each spouse owns a one-half share of undivided property. A spouse can sell, mortgage, transfer, or assign your share of the property; all of this should be done with the consent of the other spouse. There are tax advantages for married couples to own jointly held property as community property as compared to joint tenancy property. However, transfer of ownership of community property following the death of a spouse often requires a court hearing.
Community Property with Right of SurvivorshipIn California, real property owned jointly by married couples also can be held as community property with right of survivorship (CPWROS). Intended to allow for tax benefits of community property and ease of transfer of ownership following death of a spouse, CPWROS has become increasingly popular in recent years. Like joint tenancy with right of survivorship, with CPWROS the property does not become part of your probate estate after your death. Instead, your interest passes automatically to the surviving spouse outside of the probate process. Along with making it much easier to pass your ownership interest to your spouse upon the death of the first spouse to die.
Trust OwnershipIncreasingly, many California title their properties in either their individual trusts (both whole and partial interests) or in their joint trusts with their spouses. When properly structured, property titled in trusts incorporates many of the above-noted benefits while at the same time avoiding the many pitfalls.
How to Proceed?Given the many options and pros and cons of different forms of ownership, the best way to determine which choice is in your best interest is to consult with an experienced and qualified estate planning attorney.
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