Tenancy Guide

Let’s explore potential risks and consequences of adding children or other family members to the deed of trust as part of a real estate transaction.

One of the most common considerations clients have when purchasing or refinancing their home is whether to add additional individuals to title during the process. Often, these are children of the current title holders (when refinancing) or buyers (when purchasing).

When making the decision to add your child to title as a part of your real estate transaction, it is important to understand the legal implications and unintended consequences that could come along with doing so. Keep in mind, deeds are not a substitute for proper estate planning.

Whether you chose to add your child to title out of the kindness of your heart, or for future safety measures regarding the disposition of your property, you may want to consider the issues discussed below before moving forward.


Types of Tenancies

A deed to real property conveys an ownership interest in that property, and it gives the new titleholder the same legal rights as the other titleholders.

This discussion will begin with a summary of the different types of tenancies, as they each come with their own implications.

Regardless of which manner title is held, everyone on title will hold the same tenancy, whether it be tenants in common, joint tenants or tenants by the entirety.

The last tenancy (tenants by the entirety) is not a concern for purposes of this article.

However, a clear understanding of the distinctions between a joint tenancy and a tenancy in common could prevent lasting complications that you may not have anticipated.

The most common form of tenancy when adding a family member, such as a son or daughter, to title is the joint tenancy with the right of survivorship.

The defining characteristics of this tenancy is that:

  • 1. Each joint tenant owns an undivided interest in the property and
  • 2. The right of survivorship passes the property automatically to surviving joint tenant(s) when one tenant dies.

When there in only one surviving joint tenant, title vests solely in that person without the need to go through probate, the legal process of administering a person’s estate after death.

This may sound appealing, as it appears to be an easy alternative to a will or estate plan. However, there are restrictions that, without legal knowledge, one might overlook.

For example, no joint tenant may encumber the property in any way without the consent of the other tenant(s). This means that even though you conveyed title to your property to your child as a joint tenant and you remain on title, you are no longer free to do what you wish with the property without your child’s consent.

A tenancy in common is a different form to tenancy, in which each owner owns their own share (or percentage interest) of the property with the right to enjoy the whole. This means that each person has their own personal ownership of a theoretical “portion” of the property, and therefore, can do whatever he/she wants with that “portion.”

Ultimately, tenants in common are free to do whatever they wish with their share, including gift, convey, or devise.

Additionally, if the tenant in common dies, their interest will go through probate and pass pursuant to that tenants will or to that tenant’s heirs pursuant to the laws of intestacy of their jurisdiction (if they die without a will).

Each of these tenancies permit and prohibit certain acts by co-owners. For example, as mentioned, if you add your child as a joint tenant, you will need your child’s permission to do anything with the property, whether it be adding another tenant, removing a tenant, refinancing the property, taking out a loan against the property, etc.

On the other hand, if you add your child as a tenant in common, you run the risk of your child doing whatever they wish with their share without your permission and/or knowledge. This is where creditor claims and division of assets pursuant to divorce could become issues.


Creditor Issues

A monetary judgment against any co-owner can put your property at risk. One commonly forgotten issue regarding ownership of real property is that real property is a creditor’s favorite asset.

If your child runs into financial difficulties, your property could become subject to creditor claims, potentially resulting in a lien on your property, creating title issues, and likely some family frustration.

These title defects will undoubtedly be a complication in the future when the property is sold or refinanced.

If your child declares bankruptcy, your house could be sold. In this case, creditors would be entitled to a portion of interest in the equity of your property. You would be entitled to a share of the net proceeds from the sale, while the creditors use the balance to pay off your child’s the debt.

To avoid losing your home to the creditors, it would be on you to purchase that interest from your child’s creditors. Who knew adding your child to title would mean you are now paying off their debts too!


Divorce

Divorce is another scenario that could further complicate things. If your child is married, it is possible that his or her spouse may also have a marital interest in the property.

Upon divorce, your child could be required to buy out her spouses’ interest. Alternatively, the spouse could force the sale of the house.


Death

The unfortunate truth is that, even though your motivation for putting your child’s name on title may be in anticipation of your death, accidents happen, and your child could end up predeceasing you.

If title is held as tenants in common, the portion owned by your child will pass to his/her heirs or pursuant to his/her will. If your child is married, then you could end up sharing the property with your son/daughter-in-law.


Co-ownership and Mortgages

Another relevant issue is the legal consequences of co-ownership and mortgage loans.

Since most people purchasing property will have a mortgage, and those refinancing will have an existing mortgage, you should be well informed as to what happens to your mortgage when you choose to add your child to title.

When you mortgage your property, the mortgage lender could (and most likely will) require that all title holders be responsible for the mortgage. That means that financial obligations are placed on all parties, which again, requires permission from all parties.

On the other hand, if you wish to add a family member to title of a property which is already subject to an existing mortgage, you will first need your lenders approval.

When the lender has approved the transfer, the co-owner does not necessarily become a borrower simply by being put on title, but you can certainly expect to pay additional costs in this scenario.


Odd Scenario with Tenants in Common

Now, let’s say that you own property as tenants in common with someone unrelated to you, each of you owning half-interest in the property.

You chose to gift half of your interest in the property to your child. Your child now owns a quarter-interest in the property, while you own the other quarter, and the unrelated co-tenant owns half.

Now, let’s say that you, the gift-giver, predeceases the unrelated co-tenant. The unrelated co-tenant then passes their full half interest to a complete stranger.

Now, your child is stuck sharing an interest in the property with someone completely unknown to them. The new co-tenant now has all the same rights to convey, gift, or devise the property as your child and your child’s consent is meaningless.

To make matters even more complicated, the interest that remained vested in you prior to your passing will have to go through probate and will pass according to your will or based on the laws of intestacy of your jurisdiction (if you die without a will)- not to your surviving child tenant.

At the end of the day, even if all parties holding title are related, due to the nature of this form of the tenancy, there is no guarantee as to the disposition of the property when a tenant in common dies because everyone has different heirs, jurisdictions have different laws, not everyone dies with a will, and no one can predict when they will pass.


Conclusions

When you give ownership to your property to someone as a gift, almost anything that you do with the property will now require the permission of the other co-owners, if you wish to avoid title issues and/or uncomfortable living situations.

Often, it is common for those not to worry about what title issues might arise, since many of these conveyances are made in anticipation of possible death.

But to address this issue with that mind set is simply to set your child (or yourself) up for a mess in the future when attempting any sort of transaction to which your property is collateral.

The bottom line is this: Deeds should not be a substitute for proper estate planning.

Before making the decision to add your child to title, you should speak to a real estate attorney to discuss the different consequences and risks further, based on the laws of your particular jurisdiction.

For more information, contact author Kendall Clark, Esq. by emailing services@federaltitle.com or call 202-362-1500.

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