For many, part of the “American Dream” is owning real property. In retirement, that dream can often become a reality. Whether it’s finally paying off the house you’ve owned for decades, purchasing a second “vacation” home, building a family cabin, becoming a landlord, or helping a child purchase a house, property can be a source of both pride and income.
Prior to completing any property purchase, though, you will likely be asked by a real estate agent, and later by the title company handling the sale, how title is to be held.
If you ever make any major property-related decisions in retirement, it’s important that you make the correct titling decisions for your situation.
Proper titling is important for a variety of reasons. Understanding the difference betweensole proprietorship, joint tenancy, tenants-in-common, andcommunity propertyimpacts creditor protection, estate planning, and family financial harmony.
Let’s look at each of these types of titles and when they might apply.
Sole ownershipmeans just that: the title is vested in one person or entity. The buyer will sign as a single individual (having never been married) or an unmarried individual (widowed or divorced,) or a married individual acquiring an interest as sole and separate property with the other spouse relinquishing all right, title or interest.
Tenancy-in-commonallows any number of people to hold title together with each having a divided interest, equal or unequal. This form of ownership is common among business owners, parents and children, and unmarried domestic partners. Since one co-tenant cannot act on behalf of another, and they are not liable for the acts or omissions of other co-tenants, creditors can assert a claim against only a portion of the property evidenced by a co-tenant’s interest.
For estate planning purposes, a co-tenant has all the rights of a sole owner for their portion of the property, including the power of appointment to give their interest away while alive or leave an interest by will at death. (For gift or estate tax purposes, keep in mind though that the value of a co-tenant interest may be discounted if the new co-tenant does not enjoy the total ownership of the property.)
Joint-tenancydiffers from tenants-in-common in that the property ownership interests, which can be owned by any number of people, cannot be divided. There is only one title to the property, and all owners have equal rights of possession. Upon the death of an owner, that person’s ownership interest ends and cannot be willed or given away. The survivor, or survivors, retain all ownership interests.
This brings us to a common mistake made by retirees and pre-retirees, which is to put children on property as joint tenants. The thinking is that by doing so, they can pass on their property without going through probate. This can be true; however, it can also create a taxable event in that the transfer of a joint-tenant interest is considered a gift requiring the filing of a gift tax return. (This also exposes the property to creditor claims of any joint tenant.)
Since a joint-tenancy arrangement passes the property to the surviving joint tenant, the decedent tenant has no power of appointment over that property at death. Parents holding property in joint-tenancy have effectively disinherited their children since the first-to-die parent cannot appoint his/her interest in the property to an heir by means of a will.
Finally, we havecommunity property. There are currently nine community property states in the U.S.: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.
These states treat property held and titled by married couples as community property similar to joint tenancy with two very important exceptions. At the death of the first spouse, the decedent has full power of appointment, or the ability to give their interest to whomever they please. Most commonly, the property will be left to the surviving spouse to use for the rest of their life, then be passed on to the children. Finally, at death, the property receives a full stepped-up cost basis, enabling the surviving spouse to sell the property without a capital gains tax.
As you can see, the question of titling, while not necessarily complex, is certainly not one that comes with a one-size-fits-all answer. So, if you ever think about purchasing property in retirement and aren’t sure which form of titling is right for you and your family, please let us know! We would be happy to discuss your options with you.