For purposes of most investor transactions, co-ownership is generally “tenancy-in-common although several other ownership regimes exist. Tenancy-in-common means that the interest of a co-owner, absent express provision to the contrary, passes directly to that person’s heirs-who may or may not be the other co-owner(s). And, for purposes of this discussion, disregard the common meaning of “tenant” and “tenancy.” Traditional legal language can be misleading. In this context, these terms refer to owners, not renters.
Attorneys often face co-ownership issues when advising on inheritance and probate avoidance. Inheritance in such cases may be determined by express language in a deed or a last will and testament, or in the absence of either, by intestacy provisions of the Estates Code. In some circumstances, a co-owner may have no survivorship rights at all, so assumptions should be avoided. “Why do I need a will?” many a husband has asked his wife. “We’re married. You’re going to get everything when I die.” Well, maybe. See our discussion below.
Another commonly-encountered question in the area of co-ownership is how someone can be “added” to a deed (i.e., adding another person to the title to realty), which may not always be as simple as it sounds. This topic is also discussed below.
Co-Owners Who Are Spouses
Does a surviving spouse inherit the entire interest in the home when the other dies? Not necessarily. It is first necessary to determine if the deceased spouse died “testate” (with a will) or “intestate” (without a will). If a spouse dies intestate, property automatically vests 100% in the surviving spouse only if the property is community property, and the deceased had no children-or, if there are children, all of them are the result of the marriage between these two spouses (i.e., there are no children from a prior marriage, an increasingly uncommon circumstance). See Estates Code Section 201.003 for further explanation.
Co-Owners Who Are Not Spouses
Texas law presumes that if two non-spouses are named as co-owners, and nothing more is said, then they are tenants-in-common (Est. Code §101.002). This means they each person owns an undivided one-half interest in the property, but there is no automatic right of survivorship. When one co-owner dies, the interest of the deceased co-owner goes directly to that person’s heir or heirs, either by will or by intestate succession. The line of succession is vertical, downward to the heirs of the deceased, rather than horizontal, across to the co-owner.
Joint Tenancy with Rights of Survivorship (JTWROS)
Joint tenancy with rights of survivorship has been dubbed the “poor man’s will” since it eliminates the need for a last will and testament as to a particular piece of property (but not others, obviously). Again, it is ownership we are discussing here, not tenancy, but the legal acronym remains what it is. JTWROS comes up in two contexts, between non-spouses and spouses.
Estates Code Section 111.001(a) states the following as to non-spouses: “Notwithstanding Section 101.002, two or more persons who hold an interest in property jointly may agree in writing that the interest of a joint owner who dies survives to the surviving joint owner or owners.” Accordingly, business partners, or perhaps a brother and sister, may agree in writing to establish JTWROS.
As to spousal community property, Section 112.051 applies: “At any time, spouses may agree between themselves that all or part of their community property, then existing or to be acquired, becomes the property of the surviving spouse on the death of a spouse.” Section 112.052 further requires that such an agreement “must be in writing and signed by both spouses.” So long as the statutory requirements are met, no action or intervention by a court of law is required (Est. Code §112.053)-which, of course, is the goal most people have in mind when establishing JTWROS.
The simplest way to accomplish JTWROS is to recite language in the deed, which expressly declares survivorship rights. In order to make the intention of the parties plain on the face of the deed, this language should be included at the time that both spouses receive their interest in the property. An example of a grantee clause that creates joint tenancy is “John Smith and wife, Mary Smith, as joint owners with rights of survivorship as provided by Estates Code Section 112.051, and not as tenants-in-common.” The deed should go on to state that it is the intention and agreement of the co-owners to establish an agreement concerning spousal survivorship. In order to comply with the requirement that the agreement be signed by both husband and wife, both spouses (i.e., both grantees) should sign and acknowledge the deed. Our opinion is that this satisfies Section 112.051.
Section 121.152 imposes a caveat: in order for a joint tenant to inherit, the survivor must survive the deceased by at least 120 hours. If this does not occur, then “one-half of the property shall be distributed as if one joint owner had survived, and the other one-half shall be distributed as if the other joint owner had survived.”
Note that if property is currently held by two persons as tenants-in-common, they can convert this to joint tenancy by means of a survivorship agreement as provided in Estates Code Section 111.001(a) or section 112.051 (depending on whether or not the property is community property). However, this method does not physically change the warranty deed, and many persons are looking for just that-a single title document that states both names and makes survivorship clear.
The Role of a Last Will and Testament
Even if a deed contains no survivorship language, each co-owner may make his or her wishes plain by executing a valid will that provides for inheritance of the deceased’s interest (Est. Code §101.001). The Estates Code is a fallback that comes into effect by default, in the absence of a will. Failing to make a will is equivalent to asking the State of Texas to determine how your property will be disposed of. Est. Code §§ 201.001 et seq.
Deeds Prepared by the Title Company
It is rare for a title company to offer co-owners the opportunity to take title as JTWROS. When buyers arrive at a title company to close, they are often handed a minimalist deed that contains no extra clauses favorable or customized to them-unless, of course, their own attorney has negotiated the inclusion of such clauses in advance. This is unfortunate since a warranty deed is qualitatively different from the routine forms and disclosures that title companies also prepare. It is the sole document that evidences title to the property and may also set forth significant conditions upon which the seller is selling and the buyer is buying. It is far more important than, say, a MUD disclosure. And yet too many investor buyers and sellers say, “Just let the title company prepare the deed” and forgo any opportunity to have input regarding its contents. A missed opportunity, to say the least.
For investors especially, it is worth the effort to customize the warranty deed so that it suits one’s purposes. Generally, one should not expect the title company to assist with this sort of customization, at least not without being grumpy about it and perhaps increasing the deed prep charge. Title companies are insurance companies. They and their attorneys lookout for what is in their interests, not yours. It is astonishing how many people, even investors, naively believe that the title company is concerned with their best interests and will draft documents accordingly. This is false.
If buyers want to hold title as joint owners with rights of survivorship, they must specifically ask in advance of the closing that appropriate wording and signature lines be included in the deed. Ideally, this provision should be an item expressly negotiated with the seller and therefore reflected on the earnest money contract (or a special provisions addendum to the contract).
What happens if a person dies both without a will and without a survivorship provision in their deed? Such property may be “heirship property” and, without curative measures, may be unsellable except perhaps privately by means of a deed without warranties or quitclaim.
A title company will not issue title insurance until heirship issues are first addressed and resolved (they will let you know about their requirements in Schedule C of the title commitment). An affidavit of heirship is often used for this purpose (Est. Code §203.001), followed by a consolidating deed signed by the heirs. The affidavit recites relevant facts concerning family history, identifies the heirs, and is usually signed by a family member with personal knowledge. The deed is then signed by the heirs with the goal of moving title into a single heir or perhaps a third-party buyer. Both documents should then be filed in the proper order in the local real property records.
Adding Someone to the Deed
Clients often ask that their spouse or other person be “added to the deed” so that the other person will have co-ownership and inheritance rights. Prior to the adoption of the Estates Code, the old common law method was for the owner to transfer the property out to a third party (the attorney or some other trusted individual) who then transferred the property back into the two desired names with JTWROS language. Why this circuitous route? Because the common law required that JTWROS be established at the “inception of title”-i.e., at the outset, when title was first received from the previous owner.
Now, pursuant to Estates Code Section 112.051, the owning spouse may deed the property directly into his or her name together with the name of the receiving spouse (i.e., both spouses are listed as grantees with rights of survivorship) and, so long as both spouses recite terms and sign this “written agreement,” the statutory requirements are satisfied and JTWROS is created, with the names of both spouses appearing on the same deed. Care needs to be used in drafting this instrument so that all statutory requirements are satisfied. In this circumstance, the deed is both a conveyance and an agreement between the parties.
If one’s goal is to add another person to the title, but not provide for JTWROS, then one can always convey a partial or percentage interest (undivided) in the property (e.g., 50%) to the other party, but this does not result in a single document reflecting both names.
Liability on the Loan
Regardless of whether the result is tenancy in common or JTWROS, a co-owner that has been added to a deed does not automatically become liable on the loan on the property. Liability on a loan occurs only when a note is signed. No signature on a note, no liability to the bank. As has been pointed out elsewhere, title and debt are distinct concepts and can be severed.
Similarly, if both co-owners have signed the note and one co-owner sells his ownership interest, the selling co-owner remains liable on the note. Here is a common inquiry received by real estate lawyers: “I bought a home with my girlfriend ten years ago. She paid down the down payment but, I’ve made the monthly payments ever since, which add up to far more than the down payment. Can I sue her to recover my excess contribution?” The answer is probably not unless the parties had previously agreed to be business partners pursuant to Section 152 of the Business Organizations Code. Why? Because both parties are jointly and severally obligated on the note that each of them signed. The boyfriend, in making payments, was just discharging his own legally enforceable obligation.
Let’s discuss percentage deeds for a moment. As an example, if one investor owns 60%, another owns 20%, and a third owns 20%, then it is appropriate to specify these percentages in the deed by which the property is acquired, resulting in undivided percentage ownership. Alternatively, the three owners could form an entity (an LLC or a trust) to hold title, and the records of the LLC would reflect the varying membership interests or if a trust is used, the varying beneficial interests. An LLC would be preferred if the parties are concerned with potential liability associated with a rental property since trusts do not have a liability barrier.
Percentage ownership is not available in the case of JTWROS.
The Living Trust Alternative
A living trust achieves the objectives of joint tenancy and more. It is designed to hold property (primarily real estate) during the life of the trustor (the person conveying the property into trust) in order to avoid probate and potentially reduce estate/inheritance taxes at the time of the trustor’s death.
Information in this article is provided for general educational purposes only and is not offered as specific legal advice upon which anyone may rely. The law changes. Legal counsel relating to your individual needs and circumstances is advisable before taking any action that has legal consequences. Consult your tax advisor as well. Although we respect your confidentiality, this firm does not represent you unless and until it is retained and expressly agrees in writing to do so.
Copyright © 2019 by David J. Willis. All rights reserved worldwide. David J. Willis is board certified in both residential and commercial real estate law by the Texas Board of Legal Specialization. More information is available at his website, www.LoneStarLandLaw.com.