Property Ownership Comes in Several Forms

Property Ownership Comes in Several Forms

Reprinted from The Washington Times

By Michele Lerner
Special to theWashington Times

When most people get ready to buy a home, they think about such things as the type of residence they want, the neighborhood, a loan program that suits their needs, and how soon they can close a deal and settle into their new quarters. Few consider how they will legally hold title to their property.

The most common practice, particularly for married couples, is joint ownership of property with right of survivorship, which means that each spouse owns 100 percent of the residence and will inherit the entire property if one spouse dies.

A similar arrangement is tenancy by entirety, which is available to married couples and must be expressed in writing. Another frequently used form of holding title to a property includes tenancy in common, in which two or more partners own portions of a property, but not necessarily in equal parts.

Homeowners concerned about avoiding probate after death can also hold property in a trust, which means the residence (or other property) is held in the name of a person designated as the trustee. The trustee will administer the property for the beneficiaries of the trust.

Attorney Harold Miller, who specializes in estate planning, real estate and taxation issues and is licensed in the District and Virginia, recommends that more people place their property in a trust.

“Generally, I do not like people to own property in their own name,” Mr. Miller says. “I recommend a trust to people for a variety of reasons. The No. 1 reason people do this is to avoid probate and eliminate estate taxes, but I also think people should hold their property this way to protect the asset from creditors.

“If you do it at the right stage, your assets can be protected. For instance, if you put your property in a trust when you have no financial problems, you are OK. If you do it when no one’s suing you but the wagons are circling, you are still OK. However, if you wait until someone is suing you, this would be considered a fraudulent conveyance by the courts.”

Other attorneys with expertise in real estate and estate planning disagree about generally advocating the use of a trust.

“I always say you should never say never or always,” said James E. Savitz, general counsel with Village Settlements in Maryland. “There are too many personal factors which affect any decision about how to hold property, such as the health, age, financial and family status of the owners. Under some circumstances, a trust may be a good idea, such as if you are part of a blended family and want your property to be handled in a specific way after death. But 90 to 95 percent of people don’t need to get that fancy with their ownership and probably would be setting up more problems than they would be solving.”

One example offered by Mr. Savitz of a situation in which people would not benefit from holding property in a trust is a young couple with children.

“Holding a property in trust would not be the most prudent situation for a young couple because if one spouse died unexpectedly, the surviving spouse would need easier access to all property,” Mr. Savitz says, “A trust would involve certain formalities, which would complicate the lives of the surviving family members.”

Mr. Miller says he advocates the use of a trust for people in high-risk professions to protect their assets. For example, a physician concerned about the growing number of malpractice lawsuits may want to put his or her residence in a trust so that it could not be touched by creditors.

“A similar example is a farmer out in Loudoun County whose equipment was leaking oil on the land. When the environmental problem was identified, he was personally responsible for the cleanup,” Mr. Miller says. “However, if the land had been placed in a trust, the trustee would be responsible for the expenses of the cleanup.”

David Modell, a lawyer licensed in Maryland and the District, disagrees.

“A revocable trust, under both D.C. and Maryland laws, does not protect the assets of the owners or help them save in estate taxes,” Mr. Modell says. “It does serve to avoid probate, but that is not necessarily an important goal for everyone. In some cases, holding a property in trust will help speed up the process of ultimately getting that property in the hands of the proper heirs, but this is not always true.”

Some people misunderstand the value of holding a property as joint owners when facing problems with lawsuits or other creditors. A property owned as tenants in entirety by a husband and wife means that creditors can only go after a debt if it is jointly owed by the couple. For example, Mr. Modell says, a lawsuit filed against a husband for punching someone in a bar cannot be resolved by going after his house if the house is in both his and his wife’s name.

Beau Brincefield, a real estate attorney in Virginia, says: “There are many circumstances in which holding property in a trust makes sense, but I’m reluctant to make a blanket recommendation that a trust should be used in all situations. There are I0 to I5 different ways to hold real estate, and there are pros and cons for all these different ways. You really have to understand what type of real estate you are talking about and what are the needs and objectives of the people holding the property.”

In addition to the recognized estate-planning benefit of holding a property in trust, another benefit is that the changes in ownership of this property can be accomplished off-the-record, and so recording costs can be eliminated.

“There are certain circumstances under which it is the right time to put property in a trust,” Mr. Modell says. “For example, if someone owns property in more than one state, such as a home in Maryland and a second home at Rehoboth in Delaware, it would be a hassle to face probate in more than one jurisdiction. It would make sense to put their property in a trust in their names or their kids’ names, which will save money by avoiding probate in every state.

“Another time when a trust is useful is when there are multiple owners of a property, such as when four kids inherit the family home in another state. A trust could be one way of resolving some of the hassles of this situation. We’ve dealt with some properties which have been passed down from one generation to the next until each of the surviving family members only own one thirtieth of the property. A trust could help solve some of the management problems of this situation,” he says.

However, a major disadvantage to holding property in a trust is that lenders are usually unwilling to lend to a trust, preferring to lend money to a specific individual.

“Lenders make their loan decisions on two different bases,” Mr. Brincefield says. “One is asset-based, determined according to the value of the property. The second basis is the credit worthiness of the borrower. Lenders always consider both aspects of any loan, and if the property is held in a trust, then the lenders lose their guarantee of the credit worthiness of the borrower, unless the trust itself has a substantial net worth independent of the real estate.”

The bottom line, as is often the case, is that all buyers and homeowners should consult an experienced estate planning and real estate attorney before determining the best method of holding their properties.

Reprinted from The Washington Times, Friday January 29, 1999.