Property can be titled in several different ways. The five most common ways of titling property are as follows:
• Fee simple;
• Tenancy in common;
• Joint tenancy;
• Tenancy in the entirety; and
• Community property.
Each of these ways of titling property differ from the others in three key ways:
• The amount of control the title owner possesses over the property while alive;
• The extent to which the owner is legally entitled to leave the property to others upon his or her death; and
• The extent to which creditors of the owner can make claims against the property.
Fee simple ownership exists when there is only one title owner. If you own property that is titled solely in your name you possess total legal control over it. This allows you to do with it whatever you want without anyone else’s permission. You are free to retain, sell, or give the property away whenever desired. You also may say who will receive the property after your death. Finally, since only your individual legal rights are involved, any creditor of yours can make a claim against any of your fee simple property to satisfy a debt.
Tenancy in common ownership exists when two or more title owners hold the property together as tenants in common. If you own tenancy in common property, you share legal control of it with others. For example, if you and one other person own property as tenants in common, and you both own equal shares, you each own a fifty percent interest in it. If the property were sold, you would divide the profits equally.
However, ownership of tenancy in common property does not have to be in equal shares. Your share could be smaller or greater than another tenancy in common owner’s share. The legal rule for tenancy in common property is that all co-owners share in the right to fully use and enjoy the property; Therefore, even if you owned only a small fractional interest in tenancy in common property, you still have the right to use it whenever you want. Although this arrangement is beneficial for those owning small shares, it can cause problems if two or more tenants in common desire to use the property at the same time or in different ways. If you are a tenant in common, during your lifetime you can keep, sell, or gift your respective share of the property. Likewise, as a tenant in common you also may say who will receive the property after your death; however, creditor claims against a tenant in common can be made only against that tenant’s share of the property.
Joint tenancy ownership is like tenancy in common in that two or more joint tenants own the property together and each owner has the right to enjoy its entire use. A joint tenant, like a tenant in common, also has the right while alive, to keep, sell, or gift their joint tenant’s interest in the property to others.
Unlike a fee simple owner or a tenant in common, a joint tenant has no right to leave their joint tenant’s interest to others at death. When one joint owner dies, by law that tenant’s interest in the property is automatically extinguished and the surviving joint tenants continue to own the property together as joint tenants. Ultimately there will be only one final survivor left when all of the others have died. If you are the final surviving joint tenant, you will end up owning the entire property in fee simple. Creditor claims against a joint tenant can be made only against that tenant’s share in the property.
As stated above, a joint tenant’s interest is automatically extinguished upon that person’s death. A benefit of this arrangement is that no probating of joint tenancy property ever occurs. The decedent’s name is simply removed from the title and the others continue owning it together as joint tenants. While the probate free transfer of an asset is an attractive benefit of joint tenancy ownership, it often causes rather serious and unexpected consequences. Problems involving joint tenancy ownership include the following situations that frequently occur:
• Often family members purchase property together and title it as joint tenants without understanding that the last survivor will end up as the property’s sole owner. Instead, they mistakenly think that if one of them dies that owner’s share will pass to his or her spouse or children. Thus the family of the first joint tenant who dies is rudely surprised to learn they lose all rights to the property. If that were not bad enough, under the law the decedent joint tenant is treated as having made a gift of his or her interest in the property to the survivors. Thus the family of the decedent might have to pay gift taxes from the decedent’s estate for property they never get;
• If a parent remarries and retitles the family home in joint tenancy with the new spouse, the children of the first marriage will lose all rights to the home if the parent dies before the new spouse;
• If an elderly parent puts the family home in joint tenancy with an adult child, the parent loses exclusive control over the home. The parent will not be able to refinance or sell the home without the child’s approval. Also, the parent’s home becomes exposed to the child’s liabilities including automobile accidents, debts, bankruptcies, and claims of the child’s spouse if there is a divorce. If there is more than one child named as joint tenant, all of these dangers are multiplied;
• If an elderly parent retitles savings or investment accounts in joint tenancy with one child, expecting that child to share it with siblings after the parent passes on, there can be unintended gift tax consequences, even assuming the child shares it with the others (which does not always happen); and
• If a child named as a joint tenant dies first, the property might be probated and taxed first in the child’s estate and then probated and taxed a second time in the parent’s estate.
Tenancy by the entirety ownership is a way married couples in some separate property states, can title their primary residence to provide creditor protection for a surviving spouse. Following the death of the first spouse, the home titled as tenancy by the entirety automatically passes to the surviving spouse free of probate. Creditors of both spouses (such as a mortgage company or credit card company) may take this property, but creditors of only one spouse cannot. This form of ownership may be a good choice of title if either spouse might someday be subject to business or professional liability since the property is protected from creditor claims.
One major concern arises with property titled in tenancy by the entirety if there are children from a prior marriage of either spouse. When one spouse dies the surviving spouse will inherit the home while the children of the deceased spouse will be disinherited.
Community Property ownership is a way married couples in community property states can title their property to reflect that they each own half of the property. In some states community property is also referred to as “Marital Property.” Owning property as community property can help couples escape unnecessary capital gains taxes. Upon the death of one spouse the entire amount of community property gets a step-up in cost basis. This means the surviving spouse can sell property without having to pay capital gains tax after the death of his or her spouse. Community property tax treatment is available in only a limited number of states.