Title is one of those things that is both simple and complicated. Title is simply defined as: The recognition of ownership.
Where it starts to get complicated is the various kinds of title and how title can be transferred.
There are several ways title can be held:
- Fee Simple – is the most common form of ownership. The holder of the title has full possessory rights now, in the future and for an infinite duration. There are no limitations on inheritability.
- Joint Tenancy with Right of Survivorship – the owner holds an undivided share of the property. The right of survivorship means that on the death of one joint owner the surviving owner or owners retain an undivided right to the entire estate which is not subject to the right of the heirs of the deceased co-owner.
- Tenancy in Common – each owner has an undivided interest in the entire property. There is no right of survivorship. Each tenant has a distinct proportionate interest in the property, which passes by succession. There is a presumption that two or more people own the property and the ownership can be split as they decided. There is no legal requirement.
- Tenancy in the Entirety – A marital estate which can only be created between a husband and wife. It is similar to a joint tenancy except that the right of survivorship cannot be destroyed, since severance by one tenant is not possible. This title is becoming archaic since a majority of states have abolished this type of tenancy.
Now that we have a basic understanding of how title can be held, let’s look at couple of different scenarios.
Question – If you want to leave property to someone when you pass, why not just transfer the title to them?
The biggest issue with simply transferring titles of property to someone else are the tax consequences. It may not be an advantage to them.
For example: 30 years ago you purchased a house for $95,000, now it’s worth $600,000. You put $50,000 of capital improvements over the years into the property giving you a tax basis of $145,000.
You now put your only child on the title so that you can gift the house directly to her when you pass. Her basis as the “giftee” becomes your basis. So if/when she goes to sell it, she will have a $455,000 gain. There are many different ways this gain can be handled.
My point is there can be major tax ramifications. Whereas if you leave her the property as part of your estate, she will benefit from what is known as a “step up in basis.” Simply put, this means that whatever the value of the house was when she receives it from your estate is what her basis will be. So, in the example, her basis would be $600,000 and therefore no gain.
Question – What happens if you are joint tenants and one of the tenants passes? How do you get title in your name?
Under joint tenancy, on the death of one owner, the property can be automatically transferred to the surviving joint tenant. Probate is not necessary. This is called a transfer “by operations of law.” In most states all it takes is for the surviving joint tenant to take the death certificate to have the other joint tenant taken off the deed. When the surviving joint tenant receives the inherited interest, the portion will get a “step up” in basis to the current Fair Market Value