DISCLAIMER: This is not a legal opinion. Solely for information and education purposes. Please consult your attorney.
So you have bought a house. Congratulations. Now the closing date is racing toward you and the title company has called to ask, ‘How would you like to take title?’
If you are taking title with another, then the options multiply. If with your spouse, you get even more. The structure of the following article is informational, mixed with anecdotes from the eight home titles that the author has endured.
The first house we bought was a condominium in a somewhat sketchy suburb in California. California, like most states, doesn’t offer “tenancy by the entirety.” When the title company called, I responded, “What are my options?”
Tenancy in common is the default way two or more people (or entities) hold title. It’s not necessarily the best way, given your circumstances but it is a one-size-fits-all way, and that why it’s the default. With tenancy in common, owners can own unequal shares of the property. Further, an owner can sell their portion or leave their portion to heirs of their choice. i.e. John owns 30% of property A with Kathy (who owns 70%), when John dies he wills his share equally to his three children Alfred, Bonnie and Charlie. After John has died, Kathy owns 70%, Alfred owns 10%, Bonnie owns 10%, and Charlie owns 10%. This may sound attractive, but a couple words of warning. The philosophy of property is centered around it’s free transferability. If Alfred, who now owns 10% of the property wants to sell his part, he can partition the property (this is a legal action). When the court comes in to partition the property they’ll typically either force the property to be wholly sold, or force the property to be physically divided (obviously, this only works in property that can). Many of the other styles of title revert to tenancy in common when certain events or conditions are met.
In states that have community property, this is the most common method of taking title (it’s not an option elsewhere). Community property transfers automatically to the spouse upon death, like join tenancy. This is nice because the surviving spouse does not have to pay probate taxes on community property. Separation requires either the sale of community property or one party securing the interest of the other. Community property, unlike tenancy by the entirety, allows collection of debt to be satisfied against community property regardless of who owes.
This style of property ownership is easily the most common method of joint ownership, simply because this style of tenancy is allowed in nearly all jurisdictions. Joint tenancy requires the “four unities.” Time, title, interest, and possession. The owners have equal portion of the property. They have equal rights to use and enjoy the property. They all take title to the property at the same time. When one owner dies, the dying party’s interest is automatically conveyed equally to the remaining parties. Joint tenancy can be changed to tenancy in common with or without permission of the other parties. If any party shatters any one of the “unities,” the joint tenancy is destroyed, and they can do this without notice to the other parties. For instance, if John and Kathy own property A as joint tenants, and they reach a rough patch in their relationship, John can secretly sell his interest in the property to Larry. Now Kathy and Larry each own 50% of property A, and the style of title would become tenancy in common. Though John can sell or gift his property, he cannot will it. This is because upon John’s death (before the will is executed) the property is immediately transferred to Kathy, invalidating any direction in his will to do otherwise.
When we moved to Texas, we got another option offered to us…
This style requires the “four unities” of joint tenancy and a fifth of a valid marriage at the time of the title creation. It is my favorite. Why? First, let me explain how it works. In tenancy by the entireties, the marriage unit has a legal fiction ascribed. It is the marriage unit that together owns the property. In non-community property states, where debts are not shared, collections cannot be made against property held by the entirety. This is because the property is not held by the debtor, it’s held by the marriage unit. Further, upon death of one spouse, the property automatically conveys to the survivor (though transforms to sole ownership). Unlike joint tenancy, one spouse cannot choose to affect the interest of the other. Property held by the entirety cannot be sold without both parties consent. Changing from a tenancy by the entirety can only occur through divorce, joint sale, mutual agreement, or death.
Purchasing a property together is an exciting event in every person’s life. The decision of how to hold title seems unimportant, but has tremendous consequences. Even if you are in your 20’s, you could still step off a curb and get hit by a bus tomorrow. As horrible as this sounds, it happens, and the tragedy can be compounded if you don’t take proper estate planning considerations. If you are concerned, you should consult with an attorney. Don’t take your age and good health for granted, things change, and a little preparation in advance will, at least, not unnecessarily ratchet up anxieties around an unplanned event.
For more information, see investopedia