Here is a
sampling of some (but not all) of the ways to hold title to real estate, along
with some of their advantages and disadvantages:
SOLE OWNERSHIP IN ONE’S PERSONAL NAME
Advantages:
-Easy. No documents to prepare.
Disadvantages:
-No asset protection—creditors can
seize the property unless it is homesteaded.
-Property passes through probate if
owned at death, which can lead to delays and costs.
JOINT OWNERSHIP AS TENANTS IN COMMON
Advantages:
-Easy. No documents to prepare. This is the “default” ownership method when
two or more people jointly own real estate.
-Ownership shares can be
unequal—i.e., one person can own, say, 60% and the other 40% of the property. And they can take title by different deeds.
-All owners, regardless of ownership
share, have the right to occupy the entire property (called “undivided
ownership”).
-If one owner pays more than his or
her share of real estate taxes or maintenance, he or she is entitled to a
reimbursement from the other owners.
-Each owner’s ownership share passes
according to his or her will, not to the other owners (i.e., no right of
survivorship).
Disadvantages:
-No asset protection—creditors can
seize an owner’s interest in a property unless it is homesteaded.
-Majority rule does not apply. One holdout tenant can stop a sale of the
entire property or prevent improvements to the property, unless the other
tenants file an expensive and time consuming partition lawsuit.
JOINT OWNERSHIP AS JOINT TENANTS WITH
RIGHTS OF SURVIVORSHIP
Advantages:
-The surviving joint tenant(s)
automatically receive the deceased joint tenant’s share. In other words, “survivor(s) take all”,
regardless of what one’s will says.
Avoids probate for that asset.
-All owners have the right of
possession of the entire property.
-Easy. Only need to make sure the deed reads: “As Joint Tenants With Right of
Survivorship.”
Disadvantages:
-Only natural persons, and not trusts,
corporations, or LLCs, may be joint tenants.
-All ownership shares must be
exactly equal.
-All joint tenants must take title
by the same deed. This can be
inconvenient.
-One joint tenant can secretly destroy
the joint tenancy by conveying out his or her share to someone else (and even
back to himself or herself!), resulting in a tenancy in common.
-No asset protection—creditors can
seize an owner’s interest in a property during his life unless it is
homesteaded (that creditor right ends, however, at the death of the debtor
owner).
TENANCY BY THE ENTIRETIES
Advantages:
- Easy. No documents to prepare. This is the “default” ownership method when
husband and wife jointly own real estate.
-The
surviving spouse automatically receives the share of the first spouse to die,
free of estate taxes. In other words,
“surviving spouse takes all”, regardless of what the will of the first spouse
to die says. Thus, avoids probate for the
estate of the first spouse to die.
-Both
spouses have the right of possession of the entire property.
-Good
asset protection—a judgment lien against one spouse only does not attach to
property owned by both spouses. (However
a judgment lien against both spouses does attach, unless the property is
homesteaded).
Disadvantages:
-No
asset protection from a creditor with a judgment lien against both
spouses—creditors can seize the property unless it is homesteaded.
-Property passes through probate at
the death of the last spouse to die, which can lead to delays and costs.
-Both
spouses must take title by the same deed.
This can be inconvenient.
-All
ownership shares must be exactly equal.
CORPORATION
Advantages:
-Asset protection: If someone slips and falls on the property,
they cannot sue the owner individually—they can only sue the corporation. This is the key reason to incorporate.
-Different owners can have different
ownership interests. An owner’s
ownership in the property is proportional to his or her ownership of stock.
-There can be a great deal of
flexibility in the ownership arrangement among multiple owners. They would just execute a shareholder’s
agreement spelling out their respective responsibilities.
-A small business can choose its
method of taxation—either as a “C” corporation, which is how large corporations
are taxed, or as an “S” corporation, which most small corporations are taxed.
-Perpetual existence. Corporation does not die when the owners die,
unless they want it to.
-Nearly all lenders will lend money
to the corporation, as long as the owners sign personal guarantees.
Disadvantages:
-Cost and paperwork of setting up, registering,
funding, and maintaining the corporation.
-No “double” asset protection--If a
creditor has a judgment lien against one of the shareholders individually, the
creditor can seize that shareholder’s shares of the corporation.
-No homestead protection from
creditors. No homestead exemption tax
break.
LIMITED LIABILITY COMPANY
Advantages:
-“Double” asset protection: If someone slips and falls on the property,
they cannot get a judgment lien against an LLC member individually—they can
only get a judgment lien against the LLC.
Even better, if a creditor has a judgment lien against an LLC member
individually, they generally cannot seize the member’s interest in the
LLC. This is the main reason why LLC’s
are superior to corporations.
-Different owners can have different
ownership interests. An owner’s
ownership in the property is proportional to his or her ownership interest in
the LLC.
-There can be a great deal of
flexibility in the ownership arrangement among multiple owners. They would just execute an operating agreement
spelling out their respective responsibilities.
-A small business can choose its
method of taxation—either as a “C” corporation, which is how large corporations
are taxed, or as an “S” corporation, which most small corporations are taxed,
or as a general partnership. This is
another reason why LLC’s are superior to corporations.
-Nearly
all lenders will lend money to the LLC, as long as the owners sign personal
guarantees.
-Privacy. Generally, it is easier to keep ownership
interests private with an LLC than with a corporation.
-Perpetual existence. The LLC does not die when the owners die,
unless they want it to.
Disadvantages:
-Cost
and paperwork of setting up, registering, funding, and maintaining the LLC.
-No
homestead protection from creditors. No
homestead exemption tax break.
REVOCABLE LIVING TRUST
Advantages:
-Probate avoidance. Property passes according to the terms of the
trust at the death of the owner.
-Privacy. The trust is not registered or recorded
anywhere.
-Flexibility. Can be easily amended or terminated.
-No loss in tax benefits for the
property. During settlor’s life, trust
does not file a separate tax return, nor obtain a separate tax i.d.
number. Real estate retains homestead
protection, and the $250,000/ $500,000 IRC 121 principal residence sale tax
exemption is retained. (However, at
settlor’s death, when trust becomes irrevocable, the successor trustee
must file a federal estate tax return).
-No loss of homestead protection
from creditors or county tax exemption for homesteaded property.
-Federal law prohibits a lender from
invoking the “due on sale” clause when real estate is transferred into a trust.
Disadvantages:
-Cost of establishing and “funding”
the trust.
-No enhanced asset protection from
creditors. Contrary to popular
perception, a standard revocable living trust does not “shield” one’s assets
from creditors, whether before or after death. (Though assets may be more
difficult for creditors to locate if owned by a trust).
-Generally, no difference in federal
estate taxes versus owning property individually. (Except perhaps for married couples with an
A-B bypass trust, a/k/a martial deduction trust). (Some Irrevocable or QTIP trusts may
save on estate taxes).
Edward W. (Ned) Hale, is the owner of Hale Law Group,P.A. Ned, a Board Certified Real Estate
Attorney in Fort Myers.
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