Blog Post Understanding the Types of Property Ownership

[Matt]

Property is generally divided into two types, Real Property (land and buildings) and Personal property, the latter further divided into Tangible (your possessions such as clothing, electronics, jewelry etc) and intangible (monetary instruments, assets and investments). Cash seems a tough one to define, but most consider it not to be tangible, while some consider it not to be intangible. Property ownership can be structured in many ways. It is possible for a person, a corporation or a trust to own property, and it can be split between several of these entities.

Why does property ownership matter?

Getting property ownership ‘right’ creates creditor protection and streamlines estate planning. From a lawsuit protection perspective you want to minimize asset that are in your name so that if someone does come after you they can’t get everything. People often rely on just one channel to achieve this, such as pushing their assets into corporation ownership (eg having a LLC own an investment property so the tenant can’t come after your personal residence too). However, it is best to couple entity ownership with ownership dilution to best protect assets.

An example of ownership dilution is with the property ownership ‘Tenancy by the Entirety’. Property that is titled in this manner cannot be targeted by a creditor of either single spouse, instead the claim must be against both of them. This is very useful for professionals at risk of litigation, such as a Doctor. If the Doctor has a lawsuit that exceeds their liability protection it is possible to target personal assets, however the lawsuit could not include anything titled Tenancy by the Entirety providing the other spouse is not part of the lawsuit.

The Five types of property ownership

5 Types of Property Ownership

Fee Simple


This is direct ownership, in that the property is owned outright and not diluted.

Tenants in Common


This is a shared ownership, the owners do not need to be related in any way. Furthermore, the ownership can be an agreed percentage, EG Bill could own 75% and Ted could own 25%. Probate would apply to property per the ownership percentages (IE if Bill was to die, 75% would be subject to probate). Any party within a tenancy in common agreement may divest their interest without the consent of the other members, barring any additional legal demands on the agreement.

Joint Tenants with Rights of Survivorship (JWROS)


This is shared ownership between two people, they do not need to be married. Within such an agreement if one party was to die the other would inherit the ownership share via Survivorship. This is a common estate planning solution to help keep property from being acquired or challenged by other family members at time of death. The ownership will pass from the deceased to the survivor without probate. Either party may still divest their interest, and should they do so the property will default to be titled as Tenants in Common. Ownership does not have to be 50/50.

Tenants by the Entirety


This is shared ownership between two people and is shared equally, both parties have 100% claim on the property and will not go through probate at the time of death. This is the most common type of ownership for married couples.

Community Property


There are nine community property states:

• Arizona
• California
• Idaho
• Louisiana
• Nevada
• New Mexico
• Texas
• Washington
• Wisconsin

Residents of these states are subject to community property laws, which dictate that the default ownership of property acquired through a marriage is considered shared 50/50 between spouses. Furthermore property that was acquired prior to marriage must be traceable, anything that cannot be shown to be separate will often be considered Community Property. Gifts to a single spouse are frequently excluded from Community Property, however, should the funds from the gifts be co-mingled with other Community Property funds they will again be considered for Community Property.

Conclusion


Property ownership becomes more important once you start going above certain financial thresholds, or if you are more exposed to litigation. It is important to look at what ‘has your name on it’ and what would happen at time of death, or in the event of a lawsuit.



The post Understanding the Types of Property Ownership appeared first on Saverocity Finance.

Continue reading...

 

[Annie H.]

In many states when one buys property it is handled by an attorney rather than by a real estate agent as in CA and other states. It is VITALLY important to contact an attorney or CPA to make the decision on how to hold title to property owned by more than one individual. Never rely solely on the advice of a real estate or escrow agent.

There are issues relating to basis and what happens when one owner dies. For instance in CA if a couple is married but does NOT hold the property as community property but rather as joint tenants, only 50% of the property receives a stepped-up basis and that could be costly tax-wise when the property is sold. Another thing at issue is what happens when one of the owners wants to sell and the other(s) does not. This can be extremely complicated so make sure you understand everything before taking title.

Finally, it can never be emphasized enough that once separate assets (held before marriage) or assets inherited during a marriage (considered separate property) are co-mingled it is a tortous path requiring very detailed and precise records to untangle and recover for divorce or any other reason.

 

[Matt]

It is VITALLY important to contact an attorney or CPA to make the decision on how to hold title to property owned by more than one individual

On the one hand, you can't go wrong by getting an attorney/CPA involved, but on the other, for them to be successful in advising you they would really need to know a LOT about your finances - the full plan and if there were estate tax issues involved. OTOH, if you simply take the time to understand the different types of ownership and its impact, I think you will be in good shape.

There are issues relating to basis and what happens when one owner dies. For instance in CA if a couple is married but does NOT hold the property as community property but rather as joint tenants, only 50% of the property receives a stepped-up basis and that could be costly tax-wise when the property is sold.

Absolutely - JTWROS isn't a good option for many people, though it has some advantages of Tenants in Common. I'd like to hear an argument for JTWROS over CP or Tenants in Entirety.

 

[Annie H.]

My knowledge and interest is somewhat limited since we're not married and don't have access to the other two. JTWROS is "cheap" estate planning, no need for trust, etc. Tenants in Entirety(and TIC) don't generally have survivorship benefits. Without going into lots of details and research (pay attention to bankruptcy laws) it's important to do homework. I've always said it's more of a commitment to buy property with someone than to marry them.

Edit: another thing to be aware of is that if one keeps property (as a rental) but moves to a different state, the property generally retains the characteristics of the original state. Another thing to be aware of is that in some states (not sure if all community property states, not sure if that even has anything to do with it) a lien (for back child support, for instance) can be placed on "separate" property of the other spouse without notification. It may or may not be legal, but it's hella difficult to get it fixed especially when trying to sell.

Once you buy property, it's time to start thinking about umbrella liability policy.

 

[Matt]

Tenants in Entirety(and TIC) don't generally have survivorship benefits.

I was under the impression that Tenants in the Entirety does indeed have inherent survivorship benefits, do you have something to review that claims otherwise? Also, I would suggest that it might be quite useful with regard to bankruptcy due to the creditor protection.

another thing to be aware of is that if one keeps property (as a rental) but moves to a different state, the property generally retains the characteristics of the original state.

Indeed, that's a good time to put property into a LLC as you might have to pass through probate in multiple states.

 

[Annie H.]

On the one hand, you can't go wrong by getting an attorney/CPA involved, but on the other, for them to be successful in advising you they would really need to know a LOT about your finances - the full plan and if there were estate tax issues involved. OTOH, if you simply take the time to understand the different types of ownership and its impact, I think you will be in good shape.

The key here taking the time to understand the different types of ownership and impact. Absolutely. Unfortunately, esp. in community property states it can be a little more complex and with so many other things going on with the purchase of a house, it gets left to the last minute with a call from the title officer and buyers often take the advice of RE agent or title company,

I was under the impression that Tenants in the Entirety does indeed have inherent survivorship benefits, do you have something to review that claims otherwise?

You are right, I am wrong. Sorry and thanks for catching that.

Also, I would suggest that it might be quite useful with regard to bankruptcy due to the creditor protection.



Indeed, that's a good time to put property into a LLC as you might have to pass through probate in multiple states.

Can be problems using TBE for creditor protection--thanks to Mr. Google:

http://www.sbshlaw.com/five-dangers-of-holding-assets-and-property-as-tenants-by-the-entireties/
http://www.becker-poliakoff.com/910

 

[Matt]

The key here taking the time to understand the different types of ownership and impact. Absolutely. Unfortunately, esp. in community property states it can be a little more complex and with so many other things going on with the purchase of a house, it gets left to the last minute with a call from the title officer and buyers often take the advice of RE agent or title company,


You are right, I am wrong. Sorry and thanks for catching that.



Can be problems using TBE for creditor protection--thanks to Mr. Google:

http://www.sbshlaw.com/five-dangers-of-holding-assets-and-property-as-tenants-by-the-entireties/
http://www.becker-poliakoff.com/910

Certainly all about learning, hence the reason for the post! I believe it requires more depth beyond this, but it is a start.

Regarding those posts, I'd say 'Meh' as an answer. They bring up points I mentioned as strengths and spin them into negatives (which is illogical when you understand the value of the strength)

1. You must be married. TBE is only available to those in a legally recognized marriage.
That isn't a weakness of holding TBE - it is a preclusion from acquiring it - I call bollocks.

2. Assets held jointly before marriage do not automatically become TBE upon becoming married.
Good point - but that entire notion is prevalent in titling, such as CP, it also doesn't automatically become CP, indeed, if you can produce a lineage of title it is not CP.

3. TBE assets can be attacked when both spouses are liable
Or - TBE protects an asset unless you can attach liability to both spouses (my point)

4. The account must be created properly or the protection is lost
Good point, always read the terms, and you are always going to get screwed.

5. Joint with Rights of Survivorship is not TBE.
That's a point?