Title Traps

About ten years ago I did a loan for a retired teacher friend of mine. He wanted use the money to build a “Granny Unit” (Well, I guess this one was a Grandpa Unit!) over the garage. His son was moving back to town and was going to live in the main house with his wife. Actually, it’s nice to think of multi-generational houses in this day and age, but this story does not have as happy an ending as could have been the case.

Sometime a little later, they wanted to get some money out of the increased equity in the property, in part to pay off some of the wife’s bills. At her insistence they went to another lender and, in the process, the daughter-in-law insisted that she be placed on title to the property.

A few more years passed and now the son and daughter-in-law have separated and are heading for a divorce. The son has moved out and she is still living in the main home. The father-in-law, who used to own the home in its entirety, is in the Grandpa Unit. She won’t leave until she is paid for what she asserts is her one-quarter interest in the home’s equity. It reminds you of the old camel in the tent story.

California is a Community Property state so the lawyers tell me that unless she had signed a Quit Claim Deed when her son went on title, she does have an arguable interest in the property. How much? Probably less than she thinks she does. You can see that had they had an agreement about what her interest was going to be in the property at the time she went on title, it could have been handled easily.

I heard of one even worse than this. A couple gave their son $50,000 for a down payment on a home. They had been on title but when the son got married, the new daughter-in-law wanted to have it be “her house,” so Mom and Dad put her on title and deeded themselves off. Sure enough, a few years later there’s a divorce and daughter-in-law will get 50% of the equity in the home! The folks who put up the down payment get zip!

I don’t mean to pick on daughters-in-law as I’m sure there are a lot of other horror stories about sons-in-law, nephews, cousins, and so forth. But the point is the how people hold title is an important decision. Adding non-family members is even trickier and should be considered carefully.

I will refer you to a website that has a discussion of how to hold title: http://www.callandtitle.com/title/holding.html   Review this document with your spouse before taking title.

In the case of people who aren’t married, like those who are engaged but are buying property before marriage, you need to be very careful. This is especially true if, as is so often the case, one person is making more than 50% of the down payment, like all of it.

Similarly, if you are contemplating making a gift of a down payment for a home purchase or if unrelated people are buying a property, you ought to have a written agreement covering all of the potential eventualities, especially as to the division of equity when the property is sold or if one party wants to dispose of his/her interest.

Finally, I should mention trusts, the way I and many of my friends hold title to our homes. These are invariably “revocable” trusts, meaning that you can change or deed out of them. If one of the owners were to pass away, the trust document determines disposition of a property. This is much easier, faster, and cheaper in most states than going through probate in most states.

In my humble opinion, almost everyone should hold property in such a trust. It costs about $500 to set one up whereas going through probate costs a minimum of $5,000. Get with an attorney and listen to what he/she says, and I think you’ll agree with me that a trust has benefits for you.

Be careful out there!