Why Title Matters: 6 Ways to Own Real Estate
Real estate can be owned in several different ways. The form of ownership, or how your property is titled, can determine:
- How much control you have over the property
- Whether another owner must approve a transfer
- How the property may be affected by creditor claims
- Whether the property must pass through probate
- Who receives the property after your death
Property ownership laws vary by state, and changing a deed can have significant legal, tax, and financial consequences. Before transferring real estate, it is important to understand how each type of ownership works.
Here are six common ways to title real estate.
1. Individual Ownership
One of the most common ways to title property is in your name as the sole owner.
As the sole owner, you generally have full control over the real estate. While you are alive and have legal capacity, you can usually sell, mortgage, or transfer it to anyone you choose.
However, property owned individually may be exposed to claims made by your creditors.
What Happens at Your Death?
At your death, the real estate will pass according to your estate plan. If you do not have an estate plan, it will pass according to applicable state intestacy law.
If you rely on a will or state law, probate court involvement will generally be required to transfer ownership to your beneficiaries or heirs. Probate can be time-consuming, public, and expensive for your loved ones.
The Maryland Register of Wills identifies property titled solely in the deceased person’s name as a probate asset.
2. Tenants in Common
Tenancy in common is a form of ownership in which two or more people own real estate together.
Unlike some other forms of joint ownership, the interests do not have to be equal. For example, one owner may hold a 25 percent interest while another owns a 75 percent interest.
Each co-owner can generally transfer or mortgage their individual interest. However, the rights of each owner and any applicable agreement should be reviewed before a transfer.
Creditor Considerations
The more co-owners there are, the greater the possibility that a creditor issue involving one owner could affect the property.
A creditor generally seeks to collect from the ownership interest of the person who owes the debt. Depending on applicable law and the circumstances, the creditor may seek the sale or partition of the property to satisfy the claim.
What Happens When a Co-Owner Dies?
A tenant in common’s share does not automatically pass to the surviving co-owner.
Instead, the deceased owner’s interest passes according to that person’s will or, if there is no will, under state intestacy law. Probate is generally required to transfer that interest.
The Maryland Register of Wills confirms that property owned as tenants in common is subject to the deceased owner’s will and does not automatically pass to the surviving owner.
3. Joint Tenancy With Right of Survivorship
In many states, joint tenancy refers to joint tenancy with right of survivorship.
Two or more joint tenants generally own equal interests in the property. Each joint tenant may be able to transfer their interest to another person. However, doing so may terminate the joint tenancy as to that interest and create a tenancy in common.
Property law and the language of the deed determine the result.
The Right of Survivorship
The primary feature of joint tenancy with right of survivorship is that a deceased owner’s interest automatically passes to the surviving joint owner or owners.
Because the property passes by operation of law, that ownership interest generally avoids probate.
Creditor Considerations
Joint ownership may expose the property to creditor issues involving any of the owners.
A creditor may be able to pursue the debtor-owner’s interest in the property. Depending on state law and the circumstances, the creditor may also seek a sale or partition even if the other owners object.
The Maryland People’s Law Library provides additional information about joint ownership of real property.
4. Tenancy by the Entirety
In some states, married couples can own real estate as tenants by the entirety.
Tenancy by the entirety treats the spouses as a single ownership unit. One spouse generally cannot sell, transfer, or mortgage the property without the other spouse’s consent.
This ownership structure is available only when state law recognizes it and the legal requirements are satisfied.
Potential Creditor Protection
Subject to exceptions and applicable law, a creditor of only one spouse may be unable to reach property owned as tenants by the entirety.
This protection may not apply when both spouses are responsible for the debt. It may also be affected by federal claims, bankruptcy law, divorce, or the way the property was acquired and titled.
What Happens When One Spouse Dies?
When one spouse dies, the surviving spouse generally becomes the sole owner automatically. This allows the real estate to pass outside probate.
The Maryland People’s Law Library explains the differences among tenancy in common, joint tenancy, and tenancy by the entirety.
5. Ownership Through a Trust
Another option is to transfer real estate to a trust or have the trust acquire the property.
As the trustmaker, you can establish rules governing the use of the real estate. You can appoint a trustee, sometimes yourself, to oversee its management and maintenance. You can also identify the people who may use or benefit from the property.
The amount of control and the benefits available to you will depend on the type of trust.
Revocable Trust Ownership
If real estate is held in a revocable living trust you created, you can generally continue to manage and use the property during your lifetime.
You may be able to sell, refinance, or remove the property from the trust, subject to the mortgage terms and other applicable requirements.
Irrevocable Trust Ownership
Ownership through an irrevocable trust is more complicated. Transferring property to an irrevocable trust may limit your ability to control, use, sell, or reclaim it.
It may also have tax, Medicaid eligibility, creditor, and mortgage consequences. These issues should be reviewed before the deed is changed.
Mortgaged Real Estate
A primary residence with a mortgage can often be transferred to certain living trusts without triggering a due-on-sale clause.
Federal law restricts enforcement of a due-on-sale clause for certain transfers into an inter vivos trust when the borrower remains a beneficiary and the transfer does not change occupancy rights. The relevant protections appear in 12 U.S.C. § 1701j-3.
However, the federal exception does not apply to every trust, property, or loan. Other mortgaged real estate may require lender review or approval before transfer.
Trust Property Can Avoid Probate
One of the primary benefits of trust ownership is that the property can pass according to the trust terms without going through probate.
The Maryland Register of Wills explains that assets held in a trust are non-probate assets.
The trust must be properly created, and the deed must actually transfer the real estate to the trustee. Merely describing the property in the trust document may not be enough to change legal ownership.
6. Ownership Through a Limited Liability Company
A limited liability company, or LLC, can also own real estate.
Instead of owning the property directly, you own some or all of the LLC through a membership interest. The LLC holds legal title to the real estate.
An operating agreement can establish rules for:
- How the property will be used
- Who will manage the property
- How income and expenses will be handled
- Whether ownership interests can be transferred
- What happens when a member dies
- How disputes among members will be resolved
What Happens to an LLC Interest at Death?
Your membership interest may pass according to the LLC operating agreement, your estate planning documents, or applicable state law.
Transferring a membership interest does not necessarily give the recipient full management rights. The operating agreement and state law may distinguish between the right to receive distributions and the right to participate in management.
Your estate plan should therefore be coordinated with the LLC’s operating agreement.
Potential Liability Protection
One potential benefit of using an LLC is limited liability.
When a claim arises from property owned by the LLC, a claimant may generally look first to the LLC’s assets. However, liability protection is not absolute.
Personal liability may still arise if an owner:
- Personally guarantees an obligation
- Commits negligence or another wrongful act
- Fails to maintain the LLC properly
- Mixes personal and business funds
- Uses the LLC for an improper purpose
- Becomes liable under another applicable law
The protection against an owner’s personal creditors also varies by state and may depend on whether the LLC has one member or multiple members.
Because the asset-protection benefits depend on state and federal law, the LLC documents, and your circumstances, legal advice is important before transferring real estate to an LLC.
Which Form of Ownership Is Best?
There is no single form of ownership that is best for every property owner.
The appropriate title depends on factors such as:
- Whether the property is a residence, rental, or business property
- Whether the property has a mortgage
- Who should control the property
- Whether multiple people will own it
- Potential creditor and liability concerns
- Whether you want the property to avoid probate
- Who should receive the property after your death
- Possible estate, income, gift, and property tax consequences
A form of ownership that works well for one goal may create problems elsewhere. For example, adding someone to a deed may avoid probate but also give that person immediate ownership rights or expose the property to that person’s creditors.
Protect Your Property and Estate Plan
There are many ways to title real estate, and each has its own advantages and disadvantages.
Regardless of how you believe your real estate is owned, review the deed and confirm that the title supports your estate planning goals. Your will or trust does not necessarily override the form of ownership stated in the deed.
If the real estate is not properly titled, the result can undermine your estate planning intentions.
Contact McDonald Law Firm to have an experienced attorney review your property title and estate plan. We can help ensure that your property is protected and transferred according to your wishes.
- Howard County: 443-741-1088
- Montgomery County: 301-941-7809
- District of Columbia: 202-640-2133
You may also request a consultation online.
DISCLAIMER: THE INFORMATION POSTED ON THIS BLOG IS INTENDED FOR EDUCATIONAL PURPOSES ONLY AND IS NOT INTENDED TO CONVEY LEGAL, INSURANCE, OR TAX ADVICE.
