What are the Legal Entities that can hold Property Ownership

Question:  What type of Entities can hold Real Property ownership?

Answer:  There are many ways that Individuals and Business entities can hold Title in Real Estate.

1.  Joint Tenancy:  This is a form of concurrent ownership where all owners have equal rights of possession, equal interest, took title at the same time, there is one deed, and each owner has full rights of survivorship.

2.  Tenants in Common:  A form of ownership where owners have full rights of possession, but each owner can have a different percent of ownership.  Upon the death of one, that interest goes to the Heirs.

3.  Tenancy by the Entirety:  A form of ownership that only be held by husband and wife, similar to joint tenancy, except that one party cannot sell or encumber the property without the approval of the spouse.

Other considerations:

 Ownership Inside A Living Trust.

Another way for a married couple to hold title to real property is as trustees of a living trust. This will ensure that probate will be avoided, income tax will be reduced upon sale of assets and that the maximum amount of estate tax will be avoided.  Upon the death of an individual an estate tax will be assessed on all property owned. However, before the tax is assessed a credit against the tax is allowed.  While this marital exemption is extremely valuable in that it assures there will never be a tax upon the first death, it can cause a larger tax upon the second death. Without planning through a trust, the marital exemption can actually result in more estate tax being paid upon the second death.

The Revocable (Living) Trust

You can create a living trust—a document that declares how your property should be managed—naming yourself as a trustee. You may dissolve or amend the trust when you wish. You may remove the home, sell it, or refinance it.

This retention of control has several implications:

  • A revocable trust can be a great estate planning tool but it does not provide asset protection from creditors.
  • Trust assets do not go through probate if the trust document provides for a trust that survives you. Yet the home counts as part of your taxable estate.
  • You keep your personal residence sale exclusion, and any mortgage interest deduction.
  • Property taxes are not impacted, insofar as state and local governments deem the property your primary residence.

If you, as the trustee, die or become incapacitated, your named successor trustees step into your shoes. Consider appointing a neutral, corporate trustee.

Putting your home in a revocable trust (rather than giving it to another person during your lifetime) means its “stepped-up” tax basis will be the home’s market value at the time of your passing—potentially sparing your beneficiary large capital gains taxes.

Asset Protection with an Irrevocable Trust

Many people decide to put assets into irrevocable trusts to shield their assets from future (not pre-existing) creditors.

State law guides the irrevocable trust, which you can use to put your home under a trustee’s control. An irrevocable trust’s assets and income now belong not to you, but to the trust. The trustee files appropriate tax returns for the trust.

Trust assets will ultimately be passed to your beneficiary, and estate tax will not apply.

To create an irrevocable trust, draft a trust document naming the trustee and at least one beneficiary, and include instructions for managing the trust. Sign the trust document.

Be aware that placing your property in an irrevocable trust could complicate selling, or refinancing your home or tapping into the home’s equity. An irrevocable trust typically can only be set aside by a judge’s order.

LLC Ownership

If you own one piece of real estate as an investment, often the strategy is to establish an LLC in your home state, and purchase your property under that LLC’s name. This protects you on two levels: your personal assets are legally separated from your property in the event of a lawsuit aimed against your property, and your property is separated from your personal assets in the event of a lawsuit against you personally. Most people understand that maximum asset protection requires that you put one real estate property or one business in an LLC that owns no other property or operates no other businesses. We all know what happens if you put all your eggs in one basket and drop the basket – you lose all your eggs. The primary reason to put real estate properties and businesses in separate limited liability companies is so that a financial problem with one does not affect the value of any other properties or business.

On the other hand, if you own multiple properties place ownership of all of their properties under one LLC. While this is preferable to a sole proprietorship, it puts all of your real estate at risk in the event of a legal issue involving one of your properties.

Contact an Accountant and/or Attorney for full legal advice.