Owning your home seems to be a very passive activity, until some repair work has to be done. This "how to" article is not about fixing things around the house. I am going to write about how you own your residence and other real estate. The equity that a family builds up over the years in residential real estate makes up a large part of the family's wealth. So how that property is titled can be a major issue in planning for how to preserve that wealth for a surviving spouse and pass it eventually to the next generation. This can be very important for people in rural areas because of acreage that may accompany that residence.
Some years ago I assisted some people in handling their father's estate. The family homestead started out in the mid-20th century as a forty-acre tract. By the time of the father's death in 1995 it was down to 26 acres. When he died the land was worth over $35,000 an acre. Because it was in his name on the date of his death, all of the land received a "step-up" in basis to the fair market value as of the date of death. That means any profit on the sale of the property (and therefore any capital gains tax) would be determined using the date of death valuation and not the original cost from more than forty years ago. The land was sold and there was no income tax on the proceeds because there was no capital gain when the sales price matched the date of death value.
If the patriarch had titled the land jointly with his wife, then only one-half of it would have received a step-up in basis. He also utilized a very old legal technique of leaving a life estate in the property to his wife with full ownership passing to the two children after her death. I do not know if he intended it, but the result was that the property was fully protected against her creditors during her last illness because she only owned the legal right to live in the old family homestead for the remainder of her life.
That case illustrates how the titling real estate, especially when it is highly valuable, can have legal, economic and tax consequences. There are plenty of families in North Georgia with land that has been "in the family" for decades. With economic growth spreading from Atlanta to Chattanooga, some of those tracts of land are going to be worth millions of dollars.
Controlling the development of that land could be a source of contentiousness in the family. Establishing a legal entity to own the land, such as a trust, partnership or limited liability company, may be necessary to establish a policy on what to do with the land upon the death of one generation and grant authority to someone in the next generation to carry out that policy.
In some families setting that policy may be straight-forward, but there is no one available who is sufficiently sophisticated and/or trustworthy to implement the policy. In that case naming a non-family member, even a corporate fiduciary, as a trustee of a trust established to own and eventually sell the land may be necessary.
Most married couples I encounter, almost out of reflex it seems, have titled their home as joint tenants with right of survivorship. When there is not a lot of wealth tied up in the house, this is a convenient method. But what if there are hundreds of thousands in equity and there is a blended family? It might be desirable to protect the residence for the surviving spouse and still preserve the wealth for the children from a previous marriage. Again, setting up a trust to hold the property might be a good idea.
Even with a less valuable residence, joint ownership can be tricky. In Georgia the deed passing title to two people must explicitly create a right of survivorship. Otherwise a tenancy in common is created. When one owner dies that person's interest will pass through his or her estate. If there is no will and the decedent had children surviving, the children will inherit a part-interest in the residence. That could be messy for a surviving spouse.
There are many ways to title real estate. The next time you update your wills, (you do have current wills, don't you?) review the situation and make sure you are doing the right thing for the right reasons. It's one way of avoiding unpleasant surprises.