Understanding Ownership of Property
What happens to a house when the owner dies?
Estate planning can be a complicated process with a multitude of factors to be considered and decisions to be made. It all boils down to just one common denominator, however: how property is titled.
Understanding who owns what is the key to creating a good estate plan. Even the most sophisticated and well-thought-out plan will fail miserably if you don't understand how your property is titled. It might pass directly to beneficiaries by operation of law, or it might require probate.
In some cases, you might not have any right to bequeath an asset at all.
Understanding Property Ownership
Property is titled according to one of three basic concepts: sole ownership, joint ownership, or title by contract. Assets can only be titled in one of these three ways, but each can include one or more variances.
Sole ownership means that a property is owned by one person in his or her individual name and without any transfer-on-death designation. Examples include bank accounts and investments accounts held in one individual's name without a "payable on death," a "transfer on death," or an "in trust for" designation.
The property is titled in one individual's name in "fee simple absolute" in real estate. The individual owns 100% in his or her sole name without the remainder being transferred to someone else at the time of the owner's death.
Joint Ownership With Rights of Survivorship
Joint ownership comes with rights of survivorship or without these rights.
Joint ownership with rights of survivorship means that two or more individuals own the account or real estate together in equal shares. The surviving owner or owners continue to own the property after one owner dies, inheriting the deceased's share by operation of law.
For example, John and Mary would each own half the property if they were joint tenants with Joe and if Joe predeceased them. John, Mary and Joe would each have owned 33.3%, and John and Mary would each inherit 16.65% ownership from Joe.
No owner can sell or encumber the asset with liens or mortgages without the consent of the others, although they can sell or encumber it jointly.
The last surviving owner is free to do whatever they like with the property.
Tenants in Common
Joint ownership without rights of survivorship is typically referred to as owning the property as "tenants in common." Two or more individuals own a specific percentage of the account or real estate but not necessarily equal, such as one individual owning 80% and a second individual owning 20%.
Joint co-owners in this type of deed can pass their shares to beneficiaries under the terms of their wills or other estate plans. Probate would be necessary to transfer the asset.
Tenancy by the Entirety and Community Property
“Tenancy by the entirety" is a special type of joint ownership with rights of survivorship between married couples. It's recognized in some states, but not all.
"Community property" is another special type of joint ownership between married couples that's recognized in nine states: Arizona, California, Idaho, Louisiana, New Mexico, Nevada, Texas, Washington, and Wisconsin. This type of ownership does not necessarily come with survivorship rights.
Spouses can leave their 50% ownership to anyone they like when they die if they opt for survivorship rights in these states, but the property will go to the surviving spouse if they fail to do so.
Title by Contract
Title by contract refers to assets that have a beneficiary named to receive them after the owner dies. It includes bank accounts or investment accounts that have a "payable on death," "transfer on death," or "in trust for" beneficiary designation.
Title by contract also includes life insurance policies that have designated beneficiaries, as well as retirement accounts such as IRAs, 401(k)s, and annuities that have beneficiaries. Life estate deeds designate a remainderman to inherit real estate, and transfer on death or beneficiary deeds also have designated beneficiaries for real estate.
Where Property Goes After Death
Property can be viewed in two ways: It's either a probate asset or a non-probate asset.
As the name suggests, probate assets must go through a court-supervised probate process after the owner dies because probate is the only way to get the asset out of the deceased owner's name and into the name of the beneficiaries. Probate assets include sole ownership property, tenants in common property, or any other asset owned jointly without rights of survivorship.
Non-probate assets don't have to go through court-supervised probate after the owner dies because there's already a means in place to move the asset from the ownership of the deceased to living individuals. Other owners or beneficiaries take control of the deceased owner's assets by operation of law simply because they survived the deceased owner.
Non-probate assets include assets owned jointly with rights of survivorship, including tenancy-by-the-entirety property and certain community property. They include any type of asset that has a beneficiary named to inherit the asset after the owner dies.
When Assets Go Through Probate
Who inherits probate assets depends on whether the owner has left a last will and testament. The terms of the will should dictate beneficiaries if the owner left one. Otherwise, the intestacy laws of the state where the owner lived at the time of death, as well as the intestacy laws of any other state where the owner owned real estate, will determine who inherits the owner's assets.
These laws for intestate succession typically begin with the surviving spouse, then descendants. More distant relatives rarely inherit unless the deceased's spouse or children are no longer living, or if the deceased never married or had children.
Putting It All Together
You'll be left with an estate plan that will confuse your loved ones and possibly have them haggling in court if you don't take all these rules into consideration. Go through each one of your assets and write down who owns what and who is the designated beneficiary, if applicable.