The manner in which homeowners hold title to their properties has significant legal ramifications. Consequently, it's not wise to leave this important decision to chance.
Escrow agents will ask how you would prefer the title to read. But often the question isn't posed until you near the close of the sale, and by then it may be too late to give any real thought to your options.
With that in mind, here's an overview of some of the more common forms of ownership:
* Tenancy by the entirety. In most cases, this is the correct way for married couples to hold title. In fact, it is available only to married couples.
Tenancy by the entirety creates an estate in which each spouse has an undivided interest in the property, or the equal right of possession and enjoyment during their joint lives. It also vests each spouse with the right of survivorship so if one dies, his or her interest transfers to the survivor.
Since probate is unnecessary on the death of the first spouse, the property won't be tied up in court. Instead, it can be sold right away if that's necessary. Also, the survivor takes title to the share of the property attributable to the deceased at its "stepped-up basis," or its fair-market value as of the date of the spouse's death.
Equally important, the individual creditors of either spouse cannot attach a lien on a property held as tenancy by the entirety. If a judgment is against both of you, the creditor can put a lien on the house, but not if the judgment is against one of you.
* Tenancy in common. Under this alternative, each person owns a set but not necessarily equal percentage. And there is no right of survivorship. Thus, the decedent's share vests with whoever is named in the will. And unless the deceased holds his share in trust, it goes through probate just like the rest of his estate.
Furthermore, the share that transfers to the survivor counts against the federal estate tax credit. So if the husband is very ill and may not survive, it might be a good idea to retitle the house as tenants in common with him holding a 99% share. That way, when he dies, his share will pass at the date-of-death value to his wife. And then, if she must sell shortly thereafter, there may be less capital-gains tax to pay, if any.
This is often the preferred method of ownership for unrelated co-owners and for remarried couples who want to leave their share to children from previous marriages.
Co-owners may have unequal shares, and each can convey his portion without the consent of the other. When a tenant in common dies, his share is passed on according to his will or, if there is no will, by state law as it applies to intestate succession. But there is no protection from creditors.
* Joint tenancy with right of survivorship. This is similar to tenancy by the entirety, except that the property is not protected from the individual creditors of each owner. Another potential drawback is that regardless of what the deceased's will says, his share will pass to the joint tenant.
Because of the right of survivorship, joint tenancy may be the best way to hold title for parent-and-child owners. Since it is more likely that the parent will die sooner, the child will receive the parent's share at its current value.
But under this form of ownership, all joint tenants are presumed to have an equal share, a situation that may leave the co-owner parent a bit uneasy. Also, in many states, one co-owner can dissolve the joint tenancy without the other's approval, which might not make any of the owners comfortable.
* Sole ownership. For the most part, a single, unmarried buyer will take title as the sole owner in his or her name alone. It is sometimes known as "ownership in severalty."
Holding property in this manner gives you complete control. If you marry later, your spouse does not automatically acquire ownership in that property. And if you divorce, your ex may still have no claim to the property.
However, you won't have the benefits that come with other forms of ownership. You won't be able to avoid creditors or the probate process, and the property will be considered part of your estate for federal estate tax purposes.
Married persons also can take title as sole owners. But in some states, the spouse not on the title must sign a quitclaim deed, giving up any claim to ownership in that property.
* Trusts. There are many types of trusts, but the revocable living trust is probably the most common and useful for holding title to real estate. You convey title to a trustee -- who can be anyone, including yourself -- who manages the property on your behalf.
Sometimes known as an
trust, this is a tax-neutral device, meaning that all the tax benefits and burdens of ownership continue to accrue to the grantor even though he or she no longer owns the property directly.
Holding property in this manner is useful if one of the co-owners becomes incapacitated or incompetent. Then, his or her trustee can make whatever property decisions are necessary without petitioning the court for permission. Also, property held in trust passes without probate. But creditors cannot be avoided.