Ownership, Title and Vesting – More Important Than You Might Think

By Douglas Katz – 06/28/2022

HIGHLIGHTS
  • Title vesting defines ownership and who has claim to the property.
  • Proper vesting is essential to ensuring that ownership passes the way you want after your passing.
  • All vesting types have benefits and drawbacks that you need to consider especially during times of change in your situation like marriage or divorce.

If you have ever purchased or owned a home, you have undoubtedly heard the terms title or title vesting, but this was also in a short conversation and question how do you want to title the property.  The discussions usually do not involve a discussion of the benefits or shortcomings of different options.  I have personally seen a high percentage of homeowners who do not even know how they are vested.  This unfortunately equates to an ignorance on the part of the buyer about something that can drastically impact disposition of the home during times of transition like death or divorce.  When you think about this structure defines the actual ownership and rights to the property, this is disconcerting at best.  So, what are the different types of vesting and why would you choose one over the other.

Before taking the deep dive into the what, let’s spend a little more time on the why as it is exceptionally important.  Succinctly out, the vesting determines the specific rights to the property.  This impacts everything from who gets the house to who gets the profits when you pass away.  Is also impact divorce situations which I will address later.  If you want to have your wishes fully executed after your death then you need to plan using the right vesting as this will define which survivors have claim to the property and any profits.  In situations when you want to apportion different shares, you can even use a trust.  Regardless, a good vesting plan can ensured that your affairs are resolved in a manner that you intend and avoid probate.

There are five forms of vesting and each have their own benefits:

1. Joint tenancy with right of survivorship (JTWROS)

All vesting structures have pros and cons, JTWROS is considered the best for most situations with multiple owners. While generally applying to married couples, this is also a useful for scenarios when unmarried family members own a property jointly.  Under JTWROS all ownership rights are equal and they equally pass to any survivors in the event of an owner’s death.  There are no limitations on the number of people who can own the property together, but the catch is that ownership must be equally apportioned, so you cannot divide up the ownership unequally.  

2. Community property with right of survivorship

Unlike JTWROS, This type of vesting can only be used by married couples. This is one of the reasons that your marital status is required on with title vesting in any form, to include changes in marital status.  A failure to get this right or to update it in a change of status situation could end up costing you.  If, for instance, you purchase a property without disclosing that you are married, you could inadvertently give up property rights to a spouse in divorce court.  This is essential in community property states where the community property laws determine who gets the real estate.   

Current community property states:

  • Arizona
  • California
  • Idaho
  • Louisiana
  • Nevada
  • New Mexico
  • Texas
  • Washington
  • Wisconsin
  • Alaska Considered to be community property or common law hybrid state where couples can sign a joint agreement to elect to treat their assets and debts as community property
3. Tenancy in common

Like JTWROS allows for an unlimited owners but under tenancy in common allows you can apportion the ownership interest unequally.  The division of ownership does automatically NOT apply to the tax benefits and the local treasurer will not look at your vesting and apply it to a payment and the IRS will not automatically true up the tax deduction.  You will need to specifically decide this break down.  In the event of the death of a tenant in common, the property rights do NOT automatically go to the other owners. Instead, ownership goes to the deceased owner’s heirs or to a probate court if there’s no will.  So, if you have this vesting and do not have a will, do not delay in getting one.

4. Sole ownership

This one is both simple and intuitive. Under sole ownership, one person owns all rights, title and interest to the property. This does not necessarily mean that they are single, but rather that for that property there are no other owners and married person can hold title “sole and separate” from a spouse, who does not have claim to ownership of the property.  Like Tenancy in Common, a will is exceptionally important because if the sole owner dies, the property is passed on to heirs listed in a will. If there’s no will, a probate court will again come into play.

5. Living trust

Many people gravitate toward this structure when they want the most control.  A living trust allows you to articulate your intentions for what happens to your real estate after you pass. While title vesting gives some protection for survivors and provides a basic reflection of your wished, a living trust provides clear specific details.  This minimizes confusion among heirs about the division property rights upon your death which makes it very flexible and resilient to your life changes and milestones.   As an added benefit, a Living Trust also clarifies what will happen to the interest in the property if one trustor dies.  Be advised that lenders will require proof that there are no provisions of the trust that could affect their ability to foreclose on your home in the event off a default and that the trust be revocable, so be sure to check if you are buying, refinancing or changing the vesting of a property that you currently own.

As you are likely a bit confused as to which vesting is best for you, the figure below summarizes the benefits and drawbacks of each title option.  

Title Vesting Type Benefits Drawback
Joint tenancy with right of survivorship (JTWROS)
  • Simplicity
    • Ownership is evenly divided
    • The surviving owners automatically get the property if one owner dies
  • Only one title to the property
  • No limit to the number of owners
  • Heirs have no property rights before you die
  • Ownership must be apportioned equally
Community property with rights of survivorship
  • Married couples have equal ownership
  • Individual owners can transfer ownership share with a will
  • Half of the interest can be transferred to heirs if one owner dies
  • Requires that the owners must be married
  • Ownership may be willed to an undesirable owner
  • Only allowed in community property states
Tenancy in common
  • No limit to the number of owners
  • No marriage requirement
  • Interest can be divided unevenly
  • Individual interest can be sold separately
  • Owners’ interest can be passed down to heirs upon death
  • Ownership does not transfer automatically to other owners upon death
  • Requires a will to avoid probate
  • Must actively allocate the tax benefits
Sole ownership
  • Simplicity
  • Owner has 100% undivided interest and control over the home
  • Requires a will to transfer ownership and to avoid probate
Trust ownership
  • Full control of the property
  • Ability to articulate clear instructions for ownership transfer after the death of an owner
  • Flexibility to match complexity of life and family structure
  • Requires legal fees to create the trust
  • Must disclose trust to lenders for mortgage financing

So as you can see, title vesting is pretty clear cut and there are good options to match almost every client.  The problem is that most homeowners and home buyers do not give it the consideration required to avoid issues in the future.  Life changes.  People get married or divorced.  They have kids and the kids grow up.  Owners and their heirs die or in come cases become estranged, but rarely do owners take the time to deliberately and consistently match their vesting to their situation especially when things change.  Often times families find out that the vesting was wrong when it is too late.  If you are worried that your vesting and your desires are out of sync, review and adjust accordingly.  As this article is not meant to give you legal or estate planning advice, always engage a professional or professionals who can ensure that you are in the right structure.

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