Know How You'll "Hold" Title to Real Estate...Before the "Deal'n 's Done

(Say What You Mean, Precisely, or a Judge Will Decide What You Meant-#3)

Once you have negotiated a satisfactory purchase agreement (See “Watch Your Language With Off The Rack Purchase and Sale Agreements” in the “Watch Your Language” section of our Blog Site) and you have “done the right deed” (See “Watch Your Language and Do The Right Deed” in the “Watch Your Language” section of our Blog Site), your next, but often overlooked step is to decide how you wish to take title to the real estate. How does thee take title? Let us count the ways.

If you are an individual, there are several ways you can hold title:

1. Individually- You, (or your spouse, if applicable) could hold title in your individual name;
2. Tenants-in-Common - This form of taking title exists when two or more persons wish to buy property and own it together. If any of the tenants in common die, their interest passes to their heirs, not to the remaining tenants;

3. Joint Tenants with Right of Survivorship - This form of taking title is similar to the Tenants-in-Common ownership, where two or more persons may acquire title to real estate in varying “undivided percentages of interest”. Upon the death of one of the Joint Tenants, however, that particular interest automatically passes to the surviving Joint Tenant(s), without the need to go through probate. Often, husbands and wives will take title to real property as “Joint Tenants with the Right of Survivorship”.

Individual(s) can also form an entity (e.g., corporation, limited liability company [LLC]); or create a trust, for example, and have the Trustee hold property for the Trust. In fact, that is the only legal way for trust property to be held (see below).

With regard to individual or joint ownership of property, the most common, and fatal error we see is individuals intending to hold property jointly, with rights of survivorship, who forget to ensure that the required “magic legal words” are used to create such title. The “magic legal words” for a husband and wife wishing to hold title jointly, with survivorship, are as follows: “To __________ and ________, husband and wife, for their joint lives, remainder to the survivor of them”. Using variations of the foregoing, but not the specific wording has caused many courts to find what may have been intended as a joint tenancy with right of survivorship, as a tenancy-in-common instead. Bottom line: that deadbeat relative you meant to disinhereit will get your share, when you die, instead of your fellow property owner(s). Yet one more example of the recurring "moral of our 'Watch Your Language' stories": say what you mean, precisely, or a judge will decide what you meant.

If your trust or corporation is taking title, or selling its property, there are required “magic legal words” and serious repercussions for not using same for these entities as well.

In the corporate setting, we have seen single member LLC’s making the mistake of taking title in their individual names, rather than their recently created LLC name. This mistake can be “just what the doctor ordered” for a party looking to “pierce the corporate veil” and sue the principals of the LLC (rather than the LLC itself) on the basis that the LLC disregarded corporate formalities. The main reason one incorporates or forms an LLC is to limit liability to the individual’s interest in the company, rather than put their personal assets at risk. The moral for this story? Say what you mean, precisely, and make sure you use the required “magic legal words”.

Parties wanting to transfer property to a trust or from a trust must also use “magic legal words” or run the very real risk of having a court nullify their intent, and action. The best example of this unintended result is the recent 12th District Ohio Court of Appeals case: Thompson v. McVey, 2006 Ohio Ap. Lexis 7042 (12th Dist.). In the McVey case, it was intended that the trust receive certain farm property and years later transfer that property to a family member. In both deeds (to the trust and from the trust) the language designated the grantee and grantor respectively, as the “George E. Rhodes and May Rhodes Trust”. The fatal error of the Rhodes’s is that in Ohio, a trust is not an entity capable of taking title; it is the Trustee, not the trust itself, who holds title to trust property. While the probate court (the lower court in the McVey case) was convinced with good, equitable arguments and initially ruled that the parties meant for the property to come in and then out of the trust, the 12th District Ohio Court of Appeals in McVey, reversed that decision and held that since the attempted transfer was void (since it was not in the name of the Trustee), the property would remain that of the original grantor (not the trust). The moral of this story? Sometimes it is not enough to say what you mean precisely, if what you have said is not the correct statutory or case based “magic legal words” to effect your intent.

There are different estate, tax, liability, business and management issues that arise from holding different types of title to real estate. The overriding moral in all of these stories is that advice from business and legal advisors should always be sought before the deed is prepared and the "deal' in's done".

1 comment :

Anonymous said...

My husband and I have been married for over 34 years. I worked the majority of those years so he could fulfill his dream of owning his farm 100%. We purchased the farm 6 years ago and I just found out that I was omitted on all deeds relating to any of our assets. He said he didn't realize it, but I feel hurt. What are repercussions of me only being on loans but no assets??