PROPER TITLING OF REAL ESTATE CAN SAVE TIME, TROUBLE & EXPENSE
General
There are a number of ways to take title to real estate. For example, property can be held as joint tenants, as joint tenants with right of survivorship, as tenants in common, as life tenant, as a remainderman, as survivorship marital property (in Wisconsin) or a transfer on death deed may be used in Minnesota and Wisconsin. How title is taken is determinative of a number of significant legal rights and obligations. This article is intended to set forth some of those legal obligations and rights.
Joint Tenancy/Joint Tenants with Right of Survivorship
When title is held by two parties as joint tenants, or as joint tenants with right of survivorship, upon the death of one joint tenant, the survivor becomes the owner of the interest of the deceased joint tenant in the property. This takes place by filing a simple affidavit of survivorship with the proper title recording office. There is no probate. The surviving joint tenant (subject to certain limitations and conditions) obtains a new tax basis for the property and increases the tax basis by one-half (1/2) of the fair market value of the date of death of the joint tenant.
Upon a subsequent sale of the property by the surviving joint tenant, this new, increased tax basis would be used in computing the gain to that person.
Each joint tenant has what is called an undivided interest in the property. This means each joint tenant has the right to use the property in common with the other joint tenants. Thus, one joint tenant cannot exclude the another joint tenant from using the property. If joint tenants do not get along, there is an ability to bring a court action (called a partition proceeding) to divide the joint tenants’ interest in the property. The interests in the property are physically divided or otherwise divided as the court determines would be in the best interest of the parties.
A judgment or a bankruptcy of one joint tenant will cause a lien or a charge against the property, which can be satisfied from the entire property. Thus, if one joint tenant has financial difficulties, the entire parcel of property, not just his or her undivided interest can be utilized to satisfy the judgment. This is a very significant disadvantage with joint tenancy.
It is very common for a husband and a wife to own property as joint tenants. If husband and wife own real estate in Wisconsin without a designation of how they own the property on the deed where they take title, then they are presumed to hold title as joint tenants. In Minnesota there is no such presumption. The deed has to state specifically state that a husband and wife own property as joint tenants. Upon the sale by joint tenants of their interest in real estate, the proceeds of the sale are taxed and distributed in accordance with the joint tenant's percentage interest in the property. Thus, if there are two joint tenants, each will be taxed on one-half (1/2) of the gain and each will be entitled to one-half (1/2) of the cash distributed.
We believe that joint ownership of real estate as joint tenants has significant advantages for married individuals. There are a number of disadvantages, primarily, the problem with having one joint tenant having the ability to subject the entire property to his or her claims or debts that causes us to often not recommend this type of ownership for assets that are owned by other than husband and wife.
Tenants in Common
The main difference between joint tenancy and tenants in common is that upon the death of a tenant in common, the interest of that tenant in common is passed to his or her heirs. The interest of the deceased tenant in common does not pass to the surviving tenants in common. Tenants in common often are created between brothers and sisters when they inherit property or when persons are embarking on a venture together and do not have the desire to form a partnership. In essence, each party has the desire that his/her share in the property pass to his/her heirs. Each tenant in common has an undivided right to utilize the property in common with the other tenants in common, just like joint tenancy. In fact, except for the survivorship feature of joint tenancy, generally, the other features of joint tenancy are present with tenants in common. Upon the death of a person owning property as a tenant in common, there is a probate that would be necessary in order to transfer the title of the property to his or her heirs.
It is not often that we have seen individuals hold title as tenants in common. We believe it is because it does not do much for the individuals that are taking title, other than create potential problems in the future. As indicated above, this is commonly done with brothers and sisters as a result of inheriting real estate through a probate proceeding. We had an experience with a situation where a husband and a wife owned real estate as tenants in common and not as joint tenants. Upon the untimely death of one of the spouses, we had the unpleasant task of telling the survivor that she did not have clear title to her home. She had an undivided one-half (1/2) interest and by law, because her spouse did not have a will, she was entitled to a life estate in the other undivided one-half (1/2) interest in the property and her daughter had a remainder interest in the balance of the property. This was a very unfortunate and unpleasant situation as she did not have the ability to sell her home (which she had to because she could not afford to live there anymore) and, since her daughter was a minor, it was necessary to have a probate proceeding to transfer the title out of her husband's name to her daughter and to have a guardianship established for her daughter. This was done at substantial cost in time, emotional distress and money. Three words added to the deed, "as joint tenants" would have prevented this problem.
Life Estate with Remainder Interest
As indicated above, if a person dies without a will and has a homestead in his/her name and leaves a surviving spouse, then the surviving spouse is entitled to a life estate in the homestead, subject to a remainder interest to any children. What this means is that the surviving spouse has a right to live in the house as long as they live and then upon the death of the surviving spouse, the children receive the property. This is all very easy to understand conceptually, but in practice it gets a little difficult. There is the issue of ongoing maintenance and repairs. The life tenant has the obligation of paying all current bills and repairs. When does a repair constitute a capital improvement? For example, in a recent case that we handled, there was a deck that had deteriorated to the point that it had to be replaced. There was discussion between the life tenant and the remaindermen as to who should be responsible for the reconstruction of the deck. The issue was whether it was a repair or a capital replacement. The discussion and bad feelings created by it took a toll on our client, an elderly woman with limited resources.
A life tenant cannot sell the property without the consent and approval of the remainderman. In the situation mentioned above, this led to a very awkward situation in which it appeared as though the remaindermen, step-children of the life tenant, appeared to be waiting for the life tenant to die, and therefore, they would not have to share any of the proceeds of the sale with her. There are formulas provided by the Internal Revenue Service and the Department of Human Services (for medical assistance purposes) to determine the value of the life estate. These formulas were ignored by the remainderman in an effort to maximize the amount of their recovery. In short, as a life tenant, a person has no ability to sell the property without the permission of the remaindermen and vice versa.
The title of the real estate held as life tenant with a remaindermen is transferred without a probate proceeding, and the remaindermen get a full step up in basis upon the death of the life tenant. The amount of the interest of the life tenant is includable in his/her estate for estate tax purposes. If the remaindermen have any financial or other difficulty, his/her interest as a remaindermen in the property can be subjected to claims of creditors, etc. This can create some problems for the life tenant, even though, any interest that the creditor of a remaindermen would obtain would be subject to the interest of the life tenant. It creates a situation where the life tenant could be dealing with an unknown, unrelated third party that would not be willing to cooperate in accomplishing the desires of the life tenant with regard to the property, whether it be on a sale, in the performance of capital improvements or otherwise.
There are a number of other issues with regard to life tenancies with remainder interests. This is a very popular tool to avoid probate and transfer the title of assets from parents to children. There are a number of issues that are created by it, however. Before having such title of property taken in such fashion, counsel and advice should be obtained from a competent, experienced real estate lawyer.
Titling Assets in a Living Trust
It is possible to avoid probate by creating a living trust. In such event, in order to avoid probate, it is necessary to title the real estate in the living trust. One of the issues that we have run into on several occasions is the proper titling of the assets into the living trust. In Minnesota, in order for there to be a recognized conveyance to the living trust, the deed should specify that the title of the trust is going to John Doe (the name of the trustee) as Trustee of the John Doe Living Trust created by Agreement dated April 15, 2019, and his successors.
Title companies and title examiners object to title if the property was placed in the named trust rather than in the name of the trust, for example, the deed goes to the John Doe Trust. If that type of transfer is made, then additional paperwork is going to have to be required at the time of a transfer or sale. Again, when dealing with living trusts and titling of real estate is important to seek advice of a competent professional.
Survivorship Marital Property
Survivorship marital property is applicable in the state of Wisconsin because Wisconsin is a marital property law state. Survivorship marital property has all of the features of joint tenancy property with one major exception, namely, that upon the death of one of the spouses, the survivor receives a step of in basis of the entire property to its fair market value on the date of death. This is a very significant advantage for the survivor and it is my belief that if husband and wife are owners of joint tenancy property in Wisconsin, that they should very carefully look at titling that property as survivorship marital property instead of holding the property as joint tenants. Using a deed could save thousands of dollars in taxes.
Transfer on Death Deed
Transfer on Death Deeds (“TODDs”) are permitted in both Minnesota and Wisconsin. TODDs act like a beneficiary designation, similar to a beneficiary designation on a life insurance policy, for real estate. The TODD is only effective to transfer title upon death, creates no present interest in the real estate and can be cancelled at any time. There are advantages and disadvantages, as with any estate planning tool, to TODDs that should be discussed with your estate planning attorney.
Conclusion
The foregoing is a brief summary of some of the methods of holding title for real estate and some of the issues involved with each of them. There is no right situation for everyone. Each individual situation is different. There is no correct titling of assets for all individuals. What is important is to recognize the options that are available for titling of real estate and to ask that all of the options be considered and thought about at the time of taking title of real estate or when you are involved with estate planning.