Pick the Title to Your Home: Avoid a Half Million Dollar Bill

Did you know that the form of ownership on your house can affect whether or not your loved one gets to keep it on your death? Even if you leave your house to someone in your will, they might not get to keep it.

This is true not only because of the general differences in kinds of title, but also because of an old law passed in the 1980s by Congress to stop states from protecting homeowners against a certain bank practice. Bank contracts have due-on-sale clauses to accelerate mortgages of borrowers who die without bothering to pay off their mortgage.

As a compromise, the law also protects some survivors from the banks’ declaring a decedent’s mortgage due immediately, but this only applies to some survivors.

So the question is which survivors are protected? If you die, might your co-owner face a bill from the bank for the entire balance due? As it turns out, how you title your house can give you the answer.

If you have done enough research to think about buying a house, or to actually own one, you probably already know about the kinds of co-ownership that are available. Let’s do a quick review of them, and then we can explore how the choice keeps lenders from calling your mortgage.

 

Kinds of Co-Ownership

Any kind of deed can be used to transfer property not just to one person, but to an entity or to multiple co-owners. There are several ways for multiple people to own the same property simultaneously.

Tenants in Common

If you do not specify another kind of ownership, the default rule is that people who own a piece of property together own it as tenants in common. See RCW 64.28.020 (2017).This means each of them has an ownership in a percentage of the property. So if Alice and Bob buy a home together and their deed does not say anything to the contrary, the each own a percentage interest in the home. This does not mean Alice owns the 50% on the left—it means she owns 50% of everything, or whatever percentage she paid for or agreed to with Bob. She can’t sell the left half unless Bob agrees to sell it with her, although she can still sell her percentage to a third party. She (or that third party) can usually also force the sale of the entire property by taking Bob to court in a “partition” action. Then they will (usually) each get their percentage of the proceeds.

Joint Tenants

“Joint tenancy” is a shorthand term for “joint tenancy with right of survivorship.” Language in a deed creating a joint tenancy with right of survivorship means that when one co-owner dies, the other co-owner becomes the sole owner of the property. SeeRCW 64.28.010 (2017). This deed, rather than your will, controls who gets the property.

When two people co-own a property as joint tenants with right of survivorship, either one of them can at any time sever the joint tenancy and convert their ownership type to a tenancy in common. This may be done deliberately or by accident.

Joint tenancy, unlike tenancy in common, requires that the interests of all parties be equal. Thus if different co-owners contribute different amounts to the ownership of the property, a tenancy in common may be preferred. If the joint tenancy is chosen, it is best practice (to prevent the risk of accidentally severing the tenancy) to have an explicit agreement that the property will still be considered equally owned regardless of how much money one party may contribute towards it. This in turn could be construed as creating a gift from one co-owner to another, so if the contribution toward the capital in the real estate is significantly uneven some additional tax or property planning may be useful.

The canonical language to identify a property interest as being a joint tenancy is language in the deed saying “[Owner] to [A] and [B] as joint tenants, with right of survivorship, and not as tenants in common.” This makes it clear to anyone reviewing the deed that the parties intended to create a joint ownership of the house, and the parties intended the survivor of them to inherit.

Tenancy by the Entirety

Tenancy by the entirety is not common in Washington state, and if for an odd reason you think you might have one you should consult your estate planner about how to handle it. A tenancy by the entirety usually arises when a married couple in certain states such as New York purchases property together. In some states (but not all) it may provide an advantage against creditors or have the transfer-on-death character of a joint tenancy.

Community Property, Trusts, and Businesses

Note that although the above forms of co-ownership (Tenancy in Common, Joint Tenancy, or Tenancy by the Entirety) are common and appear on titles as evidence of co-ownership, there are other legal mechanisms by which multiple people can own or have control over property. This article is not addressed at them specifically.

Community Property is property which is owned by members of a couple in a community property state, like Washington. In effect, property acquired during a marriage or a “committed intimate relationship” is jointly owned by the couple involved unless they make a different agreement between themselves. Thus a person’s name may be the only one on the title, but their spouse or significant other will still have an ownership interest in the property.

Trusts are paper entities that can have ownership of property (the “trust corpus”) and can manage the property as specified in the paperwork that created the trust (the “trust instrument”). They are a common and useful tool, and they can also have multiple “beneficiaries” who are supposed to benefit from the trust management. Rather than having co-owners who will have to agree on everything, a trust instrument will name a “trustee” who is responsible for making decisions. This reduces the risk of having a falling out between responsible family members, for example. Trusts have other significant advantages in a variety of situations.

Businesses take on many forms, but are also entities that can own property and that can be owned by and serve a variety of people. So an LLC that owns a home may have multiple members who own the LLC. Similarly, a cooperative entity or a nonprofit corporation or foundation may own a home or even a large estate and may benefit a set of stakeholders or even the public.

Selecting the Form of Ownership

Selecting the form of ownership is important even if your will leaves all of your interest in a piece of property to your spouse or partner with whom you co-own the property.

This is in part because of a federal law called the Garn-St. Germaine Act of 1982. A provision of this law prevents banks from accelerating a mortgage for certain transfers of property interests resulting from your death.

The ability to accelerate a mortgage is fundamentally useful to a bank for several reasons. Most notably, if interest rates have gone up, a due-on-sale clause lets banks force survivors to either sell (in which case they get repaid and can deploy their capital to a new loan at a higher interest rate) or to refinance (in which case they hope you will refinance with them at interest rates which are higher than the interest rates you locked in when you got your mortgage).

Many years ago, banks regularly took advantage of acceleration clauses to accelerate loans upon death of the borrower. States responded by putting protections in place to protect family members from losing their home when someone in the family died. These laws varied from state to state. To fight back, the banks had Congress write a law which would explicitly prevent states from going too far to protect consumers. However, the law also provided a minimal level of uniform protection from due-on-sale clauses for borrowers.

The Garn-St.Germaine Act of 1982 thus protects homeowners from mortgage acceleration in several circumstances, including the following:

  • (3) A transfer by devise, descent, or operation of law on the death of a joint tenant or tenant by the entirety
  • (5) A transfer to a relative resulting from the death of the borrower
  • (6) A transfer where the spouse or children of the borrower become an owner of the property
  • (8) A transfer into an inter vivos trust in which the borrower is and remains a beneficiary and which does not relate to a transfer of rights or occupancy in the property

12 U.S.C. § 1701j-3(d)

This is great, so far as it goes–it protects you on transfer of the property to your own living trust, for example. And it usually protects transfers to your spouse or to relatives upon your death.

But the Garn-St.Germaine Act was also passed long before it was common for couples to own property together before marriage (or without planning to marry). Notably absent from the list of protected transfers is a transfer by will to a co-owner non-spouse non-relative. Thus unmarried couples who purchase or own property together or who own property separately that they leave to each other are notordinarily protected by the Garn-St. Germaine Act.

Solutions

There are at least two ways around this. First, the owners can simply purchase life insurance. If they are young and healthy, term life insurance to cover the mortgage should be inexpensive. Second, they can purchase the property (or title the property when they refinance) as joint tenants with right of survivorship. This joint tenancy is not the best tool for everyone, but it is a good tool for many. Critically for our purposes, transfers of these properties to the surviving joint owner occur by operation of law protected by section 3(d)(3) of the Garn-St.Germaine Act.

It is also worth noting that there is regulatory authority that purports to limit the scope of the Garn-St. Germaine Act even for married couples and relatives to owner-occupied homes. See 12 C.F.R. § 591.5. This is a problem if for any reason a survivor might want to keep but not live in the home.

Accordingly, even married people or related co-owners may likewise choose to own property as joint tenants with right of survivorship.

I hope this has been a helpful introduction. If you have questions on this or other estate planning matters, or suggested topics you’re more curious about, let me know. I am not your attorney and your circumstances may vary, so you should not consider this to be advice for your particular circumstances.

Tom White writes “A Little Deathy.” He is Attorney/Owner of King County Business Law in Seattle, Washington, is admitted to practice law in WA and NY, and is the pseudonymous author of UN-acclaimed anti-human-trafficking novelRiver of Innocents. He is an Eagle Scout and recipient of the Order of the Arrow’s Vigil Honor, and he volunteers at the Housing Justice Project. A graduate of Williams College and Georgetown Law, Tom can occasionally be spotted in the wild at Seattle coffee shops.

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