Property Agreements
When purchasing your home or other property, you don’t want to make the wrong decision about how to hold title on the property. There are pros and cons to the various types of ownership, and the way you hold title is invaluable as an estate planning tool.
Jewel & Stoneman, LLP can help you choose the type of ownership that is best for you, your family, and your loved ones. We can also review the way you currently hold title on your property to ensure that your estate planning needs are met.
The basic forms of ownership include sole ownership, tenancy in common, joint tenancy, community property with right of survorship, and community without right of survorship. There is also a valuable estate planning tool called a revocable living trust. A revocable living trust can be used to ensure that your wishes regarding your property are met and that your assets are protected.
Sole Ownership
Sole ownership is ownership by an individual. When the sole owner passes away, the property is subject to probate. There are no special tax advantages to holding property as a sole owner.
Tenants in Common (TIC)
A TIC is a very popular form of co-ownership in the Bay Area today because of the limited supply and high cost of real estate. A TIC makes it easier to afford a home by enabling people to purchase property with others who are not connected in an otherwise legally recognized relationship.
With TICs, all of the tenants have joint and several liability, meaning that all of the parties are individually responsible for the entire amount of the contractual obligation. Within a TIC, there are no rights of survivorship, so when one person dies, the others have no rights to the deceased person’s share of the property. Same sex couples not registered as domestic partners are presumed to be tenants in common.
A standard TIC agreement will address who has rights to occupy a particular portion of the property. The agreement should also contain rules about what to do if one person can’t make his or her portion of the mortgage payment or what should happen if the group is in arrears on the mortgage. Either of these situations might trigger the right to sell the property.
People recognize that they need standard TIC agreements to protect their rights to their particular units. However, unmarried couples and same sex couples occupying one unit in a TIC should consider executing additional property agreements. An additional property agreement would be necessary if the couple wanted to specify rights of survivorship or to make preparations in case the relationship should end.
Joint Tenants
Joint tenancy is a form of co-ownership where two or more people, related or not, own property together. With joint tenancy, each tenant holds an equal, undivided interest in the property. As a joint tenant, if one person dies, his or her share of the property automatically goes to the other surviving joint tenant or tenants. One of the primary advantages of joint tenancy is that it allows property to pass to the survivor without the delays and costs of probate.
Depending on the situation, there are potential disadvantages to holding property as joint tenants. One of these disadvantages relates to liability. Because the property is owned jointly by all of the tenants, the tenants can be held jointly responsible for the liabilities of any one of the tenants. If one person is involved in a drunk driving accident, for example, the tenants can suddenly lose their property. That’s a very big concern if it can be avoided.
Another disadvantage of joint property relates to gift taxes. Very often, one partner who already owns a home in an unmarried or same sex couple will add the other partner to the title as a joint tenant in order to take advantage of the rights of survivorship. When people do this, they don’t realize that they are making huge gifts to their partners and that their partners will be liable for taxes on that gift.
A third disadvantage of joint tenancy relates to the issue of accidental disinheritance. One joint tenant might want to leave a small portion of his or her estate to someone else – a child, a sibling, or a niece or nephew – but, upon the joint tenant’s death, the entire portion goes automatically to the other joint tenant. Joint tenancy rights takes precedence over instructions contained in wills.
Community Property
California’s new domestic partners’ law, AB205, which took effect in January 2005, applies community property laws to registered domestic partners. Prior to that, community property applied only to married couples. Community property applies to all property acquired during the marriage or partnership with the exception of gifts or inheritances made to one partner. With community property, everything is owned jointly and equally by both parties and is divided upon divorce or death.
California recognizes two types of community property: community property with right of survorship and community without right of survorship. With community property with right of survivorship, all of the property goes to the surviving spouse upon the death of the other spouse. With community property without rights of survivorship, each partner or spouse can leave his or her share of the property to someone other than the survivor. It is important for people to specify which type of community property they want, because if it is not specified in the deed, the courts will presume that property is held as community property without right of survivorship, and the property may go through probate.
Revocable Living Trust
A revocable living trust is a type estate planning tool. While it is not a form of title, it can be used to ensure that your instructions are met and that your assets are protected. The trust is a separate legal entity that is established during your lifetime to hold your property. The trust contains a set of instructions that you create telling your successors what to do upon your disability or death. Because the living trust does not die, it never needs to go through probate, and it can help to reduce or eliminate estate taxes. In a revocable living trust: you control the entity as a trustee, not an owner; you are the beneficiary; and you can change the terms of a revocable living trust at any time.