Avoid the Pitfalls of Real Estate Titling

Failing to properly title your home can lead to unintended outcomes that contradict or even override instructions left in a will.

Your home is probably the most valuable asset you own, and how it is titled can have far-reaching effects that may not be immediately obvious. The “title” of an asset is a legal document that specifies who owns the asset and what happens to the ownership of the asset when the current owner passes away. The title will be stated on the deed or the share certificate in a Co-Op. Title also determines how the property can be financed, improved upon or used as collateral.

Many homebuyers don’t consider, or aren’t aware of, their options for titling their property until they are approached by the title company during the closing process. By that time, it may be too late to implement the strategy best suited for their needs. Failing to properly title your home can lead to unintended consequences – in some instances, the type of ownership specified by an asset’s title can lead to outcomes that contradict or override the instructions left behind in a will. Whether you’re refinancing or purchasing a new home, getting the titling right at the outset is critical.

The Benefits of Proper Titling

A well-thought-out asset titling strategy allows you to control what happens to your assets, can minimize your exposure to taxes, and ensures that your wishes are carried out in the simplest and most efficient way possible. How you decide to title your assets will depend on the nature of the asset in question and what it is you want to accomplish, both when you are living and when it comes time to transfer the asset after your death.

Exhibit 1: Common Forms of Ownership

"asset

Skipping the Probate Process

Probate is the name for the formal court process through which your estate is passed on to your heirs after death. Depending on where you live, it could be a relatively quick process or it could be long and drawn out — up to 18 months in some states, and perhaps longer. By making sure that your assets are titled in a manner that skips this process entirely, you may save your heirs a lot of time, effort and money.

Certain types of ownership allow you to pass control of your assets to a joint owner, such as a spouse, without having to go through probate. These include:

  • Joint tenancy with rights of survivorship (JTWROS)
  • Joint tenancy by the entirety

Not all types of joint ownership function this way. For instance, if an asset is titled as joint ownership with “tenants in common,” the surviving owner does not automatically take ownership of a deceased owner’s share of the asset — the ownership is determined by the decedent’s will.

Some states have homestead statutes that protect spouses from forced sales by creditors of their primary residence and may require that the family home pass to the surviving spouse. These rules may also cap tax increases. So, it is a good idea to check the state's homestead rules. You may also transfer ownership of your assets to a trust that you’ve created. Upon your death, the trust assets would pass directly to your beneficiary without the need for probate. For example, consider a parent who purchases a new house, valued at $1.5 million, in California. The title is held as the sole owner and the will is relied on to pass the home on to his three children. Upon his death, the children needed to go through the probate process to take ownership of the home, resulting in a minimum probate fee of $28,000. (If their father had a personal representative who also chose to take a fee, the cost could be as high as $56,000.) In order to complete the transfer, either the man’s estate or his children needed to come up with a significant amount of money. Had the man established a trust for the purposes of holding the title to the property, however, he could have avoided the probate process — and this fee — altogether.

Minimizing Taxes

Depending on how an asset is titled, it may be eligible for a “step up” in basis when it is transferred. The basis is the original value of the asset in question; the difference between the basis and the value of the asset when it is sold is subject to capital gains taxes. The basis of assets that are held in an individual’s name (“sole ownership”) or as community property is “stepped up,” that is, increased, to match the value of the asset at the time of transfer. This means that the inheritor will only have to pay taxes on any growth in the value of the asset that occurs after the transfer, should they choose to sell it. Other forms of ownership may only be entitled to step up a portion of the basis upon transfer, depending on the circumstances.

A Balanced Approach to Planning

It’s important to consider the long-term implications of putting assets in a trust before choosing this path. By titling your assets in the name of an irrevocable trust, you are ceding ownership of them. This may make it difficult, if not impossible, for you to use those assets as collateral in the event you should need to borrow in the future. When designing the trust, work with your attorney to ensure that you’ve considered your future needs and have drafted documentation that is flexible enough to accommodate them. Once an irrevocable trust is established, you typically cannot make changes to the terms of the trust.

Issues such as these, where your estate plan may conflict with your present or future needs, demonstrate the importance of working with advisors who are able to help you develop a well-balanced plan. In the case of your home, you may find that not all mortgage lenders allow title to be held in a trust or LLC. A thoughtful, experienced wealth manager can work closely with your trust and estate attorney, your accountant and your banker to devise a financing strategy that ensures you are able to successfully navigate this complex territory without undermining any aspect of your plan. Together, you and your advisors can evaluate your assets, choose the appropriate titling strategy for each of them and conduct regular reviews to determine whether updates must be made to incorporate new assets or changing circumstances.

At BNY Mellon Wealth Management, we can partner with you and your advisors to identify the asset titling solutions that might best suit your needs. Our experienced team — which includes wealth managers, wealth strategists, residential mortgage bankers and private bankers — works together to understand your broader objectives and to provide customized mortgage solutions that maximize your tax advantages.

  • This material is provided for illustrative/educational purposes only. This material is not intended to constitute legal, tax, investment or financial advice. Effort has been made to ensure that the material presented herein is accurate at the time of publication. However, this material is not intended to be a full and exhaustive explanation of the law in any area or of all of the tax, investment or financial options available. The information discussed herein may not be applicable to or appropriate for every investor and should be used only after consultation with professionals who have reviewed your specific situation. The Bank of New York Mellon, DIFC Branch (the “Authorised Firm”) is communicating these materials on behalf of The Bank of New York Mellon. The Bank of New York Mellon is a wholly owned subsidiary of The Bank of New York Mellon Corporation. This material is intended for Professional Clients only and no other person should act upon it. The Authorised Firm is regulated by the Dubai Financial Services Authority and is located at Dubai International Financial Centre, The Exchange Building 5 North, Level 6, Room 601, P.O. Box 506723, Dubai, UAE. The Bank of New York Mellon is supervised and regulated by the New York State Department of Financial Services and the Federal Reserve and authorised by the Prudential Regulation Authority. The Bank of New York Mellon London Branch is subject to regulation by the Financial Conduct Authority and limited regulation by the Prudential Regulation Authority. Details about the extent of our regulation by the Prudential Regulation Authority are available from us on request. The Bank of New York Mellon is incorporated with limited liability in the State of New York, USA. Head Office: 240 Greenwich Street, New York, NY, 10286, USA.  In the U.K. a number of the services associated with BNY Mellon Wealth Management’s Family Office Services– International are provided through The Bank of New York Mellon, London Branch, One Canada Square, London, E14 5AL. The London Branch is registered in England and Wales with FC No. 005522 and BR000818.  Investment management services are offered through BNY Mellon Investment Management EMEA Limited, BNY Mellon Centre, One Canada Square, London E14 5AL, which is registered in England No. 1118580 and is authorised and regulated by the Financial Conduct Authority. Offshore trust and administration services are through BNY Mellon Trust Company (Cayman) Ltd.  This document is issued in the U.K. by The Bank of New York Mellon. In the United States the information provided within this document is for use by professional investors.  This material is a financial promotion in the UK and EMEA. This material, and the statements contained herein, are not an offer or solicitation to buy or sell any products (including financial products) or services or to participate in any particular strategy mentioned and should not be construed as such. BNY Mellon Fund Services (Ireland) Limited is regulated by the Central Bank of Ireland BNY Mellon Investment Servicing (International) Limited is regulated by the Central Bank of Ireland. Trademarks and logos belong to their respective owners. BNY Mellon Wealth Management conducts business through various operating subsidiaries of The Bank of New York Mellon Corporation. ©2021 The Bank of New York Mellon Corporation. All rights reserved.