When a husband and wife buy property, they usually take title as tenants by the entirety. With this form of ownership, each spouse owns an undivided 100 percent interest in the property.
Real estate lawyers say that married couples sometimes change the way they hold title to property to avoid or minimize estate taxes. But this strategy may not always be appropriate.
I see this happen on a regular basis, said Stanley Simon, a Manhattan lawyer who reviews co-op loans for lenders. As the banks attorney, its not my place to tell people what they should or shouldnt do. But Im not sure that the people who are doing this have really thought it through.
Mr. Simon said one of the benefits of holding title as tenants by the entirety is the ability to protect the property from creditors. He explained that when title is held as tenants in common the form of ownership typically used by co-owners who are not married to each other each owners interest belongs to that individual.
So with a tenancy in common, any owner can sell his or her interest to someone else, or if an owner dies, his or her share passes to heirs or beneficiaries. In addition, Mr. Simon said, any owner can petition a court to partition the property, a legal action that can result in a forced sale and distribution of the proceeds among the owners.
At the same time, Mr. Simon said, with a tenancy in common, if a creditor gets a judgment against an owner, that creditor also can ask a court to partition the property. In other words, the actions of one co-owner can result in the loss of the property by the other owner or owners.
But with title held in a tenancy by the entirety, when one spouse dies, the survivor automatically becomes the sole owner. And in New York, Mr. Simon said, a tenancy by the entirety cannot be partitioned by third parties. The practical effect of this is that if one spouse gets sued, the creditor cannot force a sale of the property.
A tenancy by the entirety provides the best protection for the home, Mr. Simon said.
There are, however, reasons that a married couple might want to hold title as tenants in common. William A. Cahill, Jr., an estate-planning lawyer in Brooklyn, said that under the federal tax laws marital deduction, when property passes to one spouse upon the death of the other, no federal tax is due if the survivor is a United States citizen. In addition, he said, there is a federal exemption on the first $2 million of an estate left to anyone. So, if a home owned by a married couple is worth, say, $4 million, the property passes tax-free to the survivor when one spouse dies, regardless of how it is owned.
But when the second spouse dies, things get tricky. Since the federal exemption is $2 million, the value of the home above that amount in this case, $2 million is subject to tax when the property passes from the surviving spouse to beneficiaries.
Estate lawyers get around this, Mr. Cahill said, this way: instead of holding title as tenants by the entirety, a married couple owns as tenants in common. Then, the first spouse to die can pass his or her interest to the children in trust, allowing the survivor to remain in the property for life. And both spouses are able to take advantage of the $2 million exemption instead of one.
Ralph M. Engel, a Manhattan estate-planning lawyer, said that while a surviving joint owner may be able to renounce the interest owned by a deceased joint owner for tax purposes, it is generally more expedient to change the form of title ahead of time if estate taxes will be an issue. So, he said, property owners should carefully examine their financial situation to determine which form of ownership makes the most sense.
Not everyone is going to get sued, Mr. Engel said, but were all going to die.