I recently read that Apple co-founder Steve Jobs and his wife placed at least three properties into trusts in 2009 as a part of his estate planning process. Steve Jobs was a pretty smart guy (as if we needed further evidence). He must have been advised that there are many potential benefits to holding real estate in a trust, depending on one's objectives and situation. However, you don't need to be a billionaire to benefit from this type of estate planning. Perhaps you want to leave property to your heirs without the need for going through probate. Or perhaps there are several owners of a property. Below are pros and cons of the five most widely used methods of holding title to your real estate.
When a property owner holds title to a property in his or her name alone, this is called sole ownership or ownership in severalty. This type of ownership is appropriate if you are single, and but it is also available to married couples. Usually, the spouse of the sole owner is asked to sign a "quitclaim deed" that gives up any ownership claim. Sole ownership might be appropriate, for example, when one spouse engages in real estate investing.
Sole ownership's disadvantages include lack of tax advantages and the inclusion of probate cost and delays when the owner dies. But most single owners use this title method because they are not aware of a better alternative.
Tenants in Common
Two or more co-owners, usually not married to each other, often take title as tenants in common. An advantage to this ownership structure is that each owner can own a specific, unequal share. For example, one might own a 25 percent share, another a 50 percent share, another 10 percent and the fourth 15 percent.
When one tenant in common dies, the share passes according to the terms of that tenant's will. (Tenancy in common is especially popular in second marriages because the co-owners can will their shares to children from a prior marriage.) This can become a disadvantage, however, if the inheriting co-owner doesn't get along with the other tenants in common. Complications can also arise of one tenant runs into financial hardship, such as bankruptcy. Additionally, tenancy-in-common shares are subject to probate court costs and delays.
A further tenancy-in-common disadvantage, also applicable to joint tenancy, is that one tenant in common can force a sale of the property even when the other co-owners do not want to sell. Such a legal action is called a "partition lawsuit," in which the court orders the property sold and the proceeds divided among the tenants in common (or joint tenants).
Joint Tenancy with Right of Survivorship
A popular way for husbands and wives to hold title is joint tenancy with right of survivorship. All joint tenants must take title at the same time and hold the same interest.
An advantage to this type of ownership is that when one joint tenant dies, the surviving joint tenant automatically receives title without probate costs and delays. All that is usually required is a certified copy of the death certificate and for the survivor to record an affidavit of survivorship. The deceased's will has no effect on joint tenancy property.
Joint tenancy can bring about complications, however. One joint tenant can convey his or her share without the other joint tenant's approval, thus ending the joint tenancy and creating a tenancy in common. As mentioned earlier, a joint tenant can bring a partition lawsuit to force a sale of the property if the other owners do not want to sell.
Tenants by the entirety
Tenancy by the entirety is similar to traditional joint tenancy, with the major difference being that one spouse cannot convey his or her share of the property without the other spouse's signature. This option is not available in every state, but it is available to Illinois real estate owners and has become the preferred method of taking title.
Specifically, the Illinois law says that "any real estate . . . held in a tenancy the entirety shall not be liable to be sold upon judgment entered . . . against only one of the tenants. If you and your spouse held your house in a tenancy by the entirety, a creditor with a court judgment against only you, and not your spouse, couldn't touch the house, as long as you live in the house with your spouse. The one exception is that joint tenancy in the entirety does not stop a house from being sold to pay an IRS debt owed by only one spouse.
Otherwise, if someone has debts or liabilities from which they'd like to protect their spouse, a tenancy by the entirety can place their house beyond the reach of creditors. The law "exempts" the residence by saying it's simply not an asset those creditors can levy or foreclose upon.
Another method of holding title to homes and other major assets is in a revocable living trust. There are many types of trusts, but the revocable living trust is the most common and useful for holding title to real estate. With this ownership structure, until the death or disability of the trust holder, or "trustor", the home and any other property held in the trust, such as realty bank accounts, stocks, and bonds, can be managed, bought and sold by the trust holder.
Since the living trust is "revocable", it can be amended as circumstance change. However, if a trustor becomes incompetent and unable to manage affairs, the alternate trustee (such as spouse or adult child) takes over management of the trust assets. When the trustor dies, the living trust assets are distributed according to the trust's terms.
Privacy is a major living trust advantage. Unlike a will, which becomes part of the public probate file of a deceased, the living trust terms remain private. Additionally, distribution of property held in a living trust can be much faster than probate, assets in a living trust can be more easily accessible to the beneficiaries of the trust, and the cost of distributing assets held in a living trust is often less than going through probate. A living trust also simplifies the distribution of properties held in more than one state.
Of course, every situation is unique. Contact our office to set up a consultation so we can determine the best ownership structure for your real estate and other property holdings.