There are many decisions you need to make when buying a piece of real estate. Some are obvious – price, settlement date, inspection clauses, loan type etc. How to take title is one decision people often do not think about but should as it can have a huge impact on your future financial well being and that of your family. If you are married, tenancy by the entirety (T/E) offers the greatest protection for this most valuable asset. Recently I have had several cases that demonstrated the power of this strategy. And with the recent Supreme court ruling on same sex marriage, this protection is now available to whole new group of homeowners.
FIRST A DISCLAIMER
I am not an attorney so use this information as a guide. Do not change your ownership status simply because of this article. Make sure you ask detailed questions of a real estate attorney to verify the info here is correct and that these ideas are right for you.
BASIC TYPES OF OWNERSHIP
Outside of trusts, LLCs and other creative strategies, if you are buying with someone else you have 3 choices.
Tenants in common – Under this kind of ownership when one party dies, their percentage of ownership passes according to their will. This is commonly used used for 2 unrelated owners. Sometimes, I have seen this in 2nd marriages where one spouse prefers that their ownership pass to children from the first marriage and not to the surviving spouse.
Joint Tenants with the right of survivorship – Upon death, the ownership of the deceased party transfers to the surviving party. I see this when parent and child buy or brother and sister buy or 2 people in a close relationship that are not married purchase together. But if they are married, most people use…
Tenants by the Entirety. ( My understanding is that this type of ownership is not available in all 50 states but it is here in Virginia..) Like, Joint Tenants with the right of Survivorship, upon death, the ownership of the deceased party transfers to the surviving spouse. But while alive, this type of ownership offers other protections and benefits. When 2 people own using T/E, legally the property is viewed as having one owner. The two people become one in the eyes of the law. So the debts and obligations of one spouse can not attach to the property. Only the debt or obligation signed by both parties could potentially attach to the home. Not too important you say? Well here are 3 cases I have experienced where it was important. The dates, towns and names have been changed for privacy reasons but the facts relating to ownership issues are true.
I THOUGHT THAT JUDGMENT WAS CLEARED UP!
Samuel and Rachael were serial entrepreneurs. Some of their ventures had been quite successful and others not so much. A few had resulted in lawsuits. Samuel knew that Rachael had an judgment that was being appealed and had yet to be 100% resolved. So when they set out to buy their condo in Springfield VA a few years back, Samuel said he would do it in his name only. He had plenty of cash so we wrote the contract for cash but put in that he had the right to get financing. Presenting a cash offer would mean more favorable terms from this nervous seller since we would have no financing contingency.
Shortly after ratification, the title company called to say they had found a 10 year old judgment against Samuel. He was floored as he thought that had been cleared up. Well in order to get traditional financing, the buyer can have no outstanding judgments. Any existing judgments need to be paid at closing. Samuel did not think he owed this. However, the time needed to straighten it out could be months and we needed to close in 30 days. We were glad he had cash or the deal would have died then. We took financing off the table and decided to proceed with the cash deal. But……
If Samuel bought this property for cash, the moment it was on the county record, the judgment would attach to the house. Samuel’s ability to resolve this would be severely compromised and certainly more complicated. Samuel thought the condo deal was dead and apologized for having taken up so much of my time in what had been a long search. But this is where an experienced agent comes into play. (To read more stories on why experience matters, click here.)
I suggested he speak with the settlement attorney about owning the property with his wife T/E. Remember, the world views this ownership as one entity and the debts of one spouse can not attach to the property. The only judgments that can attach are judgments against both spouses. So here the house was protected from Rachael’s individual judgment and Samuel’s individual judgment. They now had time to resolve both. Once resolved they planed to do a cash out refinance of the property to get them back to where they wanted to be in the beginning.
MY WIFE IS NOT WORKING SO I WILL JUST TAKE OWNERSHIP IN MY NAME
It is true that if one spouse is not working, having just the working spouse apply makes the loan process so much easier. But loan obligations and title structure are two different things. It is entirely possible for one spouse to get the loan but the title to be under both spouses as T/E.
Richard owned his own very successful construction business. However, self employed individuals can easily be sued and piercing the corporate shield can happen. So I advised Richard that to protect his family, he should seriously consider owning the property as T/E with his wife so the home would not come into play if anything horrible happened with the business.
Anybody who is in a business where they are potentially subject to a lawsuit (medical professionals, business owners, etc.) should not have their home in their own name if they are married and want the house house to pass to their spouse upon death. Again, there may be situations where how the house passes upon death is more important than protecting the asset. An attorney can help you decide the best way to proceed.
A SHORT SALE MORPHED INTO A LONG SALE AND ALMOST BECAME NO SALE
Anthony and Sandra finally found the home they wanted in Reston VA. It was close to their work but it was a short sale. As usual, we waited and waited for approval and finally 5 months later, we got written approval.
The title company updated the title work they started 5 months earlier and a new problem surfaced. It is not hard to imagine that anyone involved in a short sale is in financial distress. Well, an updated title search showed that Mr. and Mrs. Seller now had credit card judgments against them. After all of this waiting, that could have been a show killer as prior to settlement, a seller must clear all judgments that could possibly attach to the house. But fortunately for Anthony and Sandra, Mr. & Mrs. Seller owned the house as T/E. The title company received documentation to indicate that the credit cards were individual cards and thus the judgments can not attach to the house so we proceeded to settlement.
REAL ESTATE OWNERSHIP AND SAME SEX MARRIAGE
In light of the Supreme Court ruling on same sex marriage, I would assume (again not an attorney) that married same sex couples can now enjoy the benefits of T/E. There are many same sex couples who bought together before marriage was legal and may be in a position to change their ownership status. Or there may be same sex couples where one bought as an individual but since got married. If you know anyone in that category, encourage them to contact an attorney to discuss their situation.
Changing an existing joint tenancy to T/E would only be a few hundred dollars. Adding a spouse to title should be about the same. If you add a non-spouse to title, you could trigger the due on sale clause in your loan. Adding a spouse does not.
So bottom line, when buying a home with another person it is important to think about what you want to happen once you die and to make sure your home is protected against creditors. We never know what can happen in the future and preparing now gives us more options and less worry if problems arise.