When Real Estate is owned by a parent and childBy
Last week, I had a client ask me what the best way to vest title when purchasing property with a child. This is an ever recurring question as to what is the best way to hold title between a parent and child. Property is often acquired with a child due to a joint investment the parent or child can’t qualify for a loan, or the parent or child wishes to gift an interest to the other.
Before I can answer this question, it’s helpful to understand the various ways two parties can hold title to property.
A joint tenancy is created by two or more individuals. Each joint tenant must have an equal percentage of ownership. When one joint tenant dies, the property automatically passes, without any court action, to the surviving joint tenant(s). Joint tenancy requires four unities:
- Time. Each owner must receive title at the same time.
- Title. Each owner must receive title on the same deed or document evidencing title.
- Interest. Each owner receives the same proportionate and equal share of ownership.
- Possession. Each owner has the identical right of possession.
Tenants in Common
A tenancy in common can be created by two or more individuals, and tenants can have an unequal percentage of ownership. Ownership can be acquired at different times. The only unity required to create a tenancy in common is possession; each owner has the same right to occupy the property. For example, John could own 50%, Mary 25% and Bill 25%. When a tenant in common dies, their share of the property transfers to their heirs according to their written estate plan -a will or trust – or, in the absence of a written plan, according to state law.
Community Property can only be created between married spouses. Each spouse owns an equal interest in the property. There is no automatic right of survivorship, so each spouse can bequeath their interest as they choose. Unless the spouse upon death desires that the property transfer to a non-spouse, the property will transfer to the surviving spouse.
Community Property with Rights of Survivorship
This form of vesting title has similar characteristics to community property. The difference here is that there is an automatic right of survivorship (or transfer) to the surviving spouse upon death. Therefore, the property transfers to the surviving spouse, even if the spouse leaves a will specifying otherwise.
Now, back to the question of what considerations are needed when determining how to vest title with a child. If a parent desires to take title with a child, community property is not an option; they can only take title as joint tenants or as tenants in common. So if neither the child nor parent has a trust, which form of title is preferable?
If both the child and parent desire that the property automatically transfers to the survivor of them, then joint tenancy may be the most desirable solution.
In the case where one of them wants to specify that their interest doesn’t automatically pass to the survivor of them, then tenants in common is the better choice.
Most importantly, when property is held by either the parent or child in a revocable living trust, the property is a tenancy in common and NOT a joint tenancy.
Problems may arise if only the parent (or child) holds the property in their revocable living trust (for example, if the parent has a trust and the child doesn’t). If the parent dies first, the property transfers to heirs according to the instructions in the parent’s trust; there is no court involved at the time of transfer. However, if the child dies first, the child’s interest in the property will be transferred according to the child’s will or according to state law. Unfortunately, the property will have to go through the court process known as probate. Probate is a lengthy process taking an average of 12-16 months to complete and an expensive process with probates on average costing about 5% of the fair market value of the property.
Therefore, if a parent wishes to control their share of the property and does not want the property to automatically transfer to the child upon the parent’s death, they must put the property in trust. Then, to avoid the problem of the child’s share having to go through probate, the child would be advised to establish a living trust also.