About To Close? Make Sure You Pick The Right Title Option

One of the most important decisions that needs to be made at closing is how you choose to hold title. It determines how you will be insured, but it can also have significant legal and tax consequences.

For example, there is an option available to married couples that provides protection from creditors in the event of the death of one of the spouses. There is also an option that affords a “right of survivorship” between unrelated owners. If not set up correctly, how you hold title can create unanticipated complications when you decide to sell or transfer the title to someone else.

For example, years ago, a married couple decided to take title to their house as “joint tenants” or joint owners. The husband had children from a previous marriage and intended to will his share of the property to his children. He was not aware that when one joint tenant dies, his or her interest automatically passes to the surviving owner and by law cannot be willed to anyone else.

Fortunately, the couple discovered this stipulation before closing, and took title instead as “tenants in common.”

There are six common ways to hold title, and the first three are reserved exclusively for married couples:

• Tenancy By The Entirety…

This is a special type of joint tenancy with rights of survivorship that is recognized between married couples in the District and 18 states — Alaska, Arkansas, Delaware, Florida, Hawaii, Maryland, Massachusetts, Mississippi, Missouri, New Jersey, Oklahoma, Pennsylvania, Rhode Island, Tennessee, Vermont, Virginia, Tennessee and Wyoming.

It allows spouses to own property as a single legal entity, offering protection to a surviving spouse from creditors of the deceased spouse.

• Community Property…

Besides being available to married couples, community property can be used by registered domestic partners in nine states — Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin.

• Community Property With Right Of Survivorship…

Another way to hold title is survivorship community property — currently available in Alaska, Arizona, California, Nevada and Wisconsin. Property held in this manner does not have to pass through probate when one spouse dies, and the title passes directly to the other spouse. It is similar to holding title in joint tenancy, but it is limited to married couples or registered domestic partners.

• Sole and Separate Property…

Sole and separate property means that no one else has any interest in the property. If you are married and want to take title this way, you should record a quitclaim deed from your spouse to yourself so that no “community interest” could be claimed at a later date. This applies only in community property states.

• Joint Tenancy…

The distinguishing characteristic of joint tenancy is the right of survivorship. If one of the joint tenants dies, his or her interest automatically passes to the surviving party or parties instead of being tied up in lengthy probate proceedings.

Joint tenants own an undivided equal interest in the property and have the same rights to the use it. For example, neither co-tenant can distinguish which portion of the property he or she owns. Once a joint tenancy has been created, no joint tenant can sell his or her interest without terminating the joint tenancy. If either sells his or her interest, the buyer comes in as a tenant in common rather than as a joint tenant.

• Tenancy In Common…

When two or more people buy property together, whether their shares are equal or unequal, they are hold the property as tenants in common.

Tenancy in common is so standard as a form of ownership for unrelated buyers that it is generally presumed to be the way they hold title if nothing else appears to the contrary. The shares are also presumed to be equal, unless they are listed otherwise on the deed, and each of the tenants has equal rights of possession. Each co-tenant owns an undivided interest, but unlike a joint tenancy, these interests need not be equal, may arise from different conveyances, and do so at different times.

At some point, you may decide that you want to change the way you hold title to, for example, place the property in trust for a child or to gift property to adult children.

It can be a relatively simple matter to change the form of ownership. Single people can use a quitclaim deed to transfer the property from themselves to themselves in the new category in which they wish to hold title. Married couples would follow the same procedure using an interspousal deed.

Depending on your area’s regulations, you may need to use particular wording in your deed, so it is a good idea to get the advice of a professional or lawyer first. You will need to get the deed acknowledged before a notary public, and then have it recorded at the clerk’s land records office.