At ARS we are occasionally asked by clients to recommend how multiple parties should take title to real property. Should it be as joint tenants, as tenants in common, as community property, or something else? We will inevitably decline to provide an opinion because, one, we are not a law firm, and two, we do not know the borrower’s family or financial situation and therefore are not in any position to make such a recommendation.

There are some situations, however, where we feel obligated to comment on the lender’s or borrowers’ proposed method of holding title because we know it will not have the effect desired by the parties.  The most prominent example occurs when one borrower holds title to property in a trust created by that borrower, and of which the borrower is both sole trustee and sole primary beneficiary, while the borrower’s spouse, also a borrower, has no interest in the property. In our experience lenders generally require both borrowing spouses to have an ownership interest in the property, but rather than amend the trust to add the spouse as a primary beneficiary, the borrowers request a deed adding that spouse to title, so that vesting would read:

Harry Husband, as Trustee of the Harry Husband Trust dated April 1, 2010, and Wendy Wife, as joint tenants with rights of survivorship.

Sounds pretty good, right? And it appears to meet the four required unities for the creation of a joint tenancy: each owner has an equal ownership percentage, in this case 50% each; the interests were created at the same time; all owners have an equal right to possess the land; and finally, each joint tenant has survivorship rights.

Ah, but it is that last unity – survivorship rights – that we need to look at more closely.  Under a survivorship scenario where Wendy Wife dies, the trust would own 100% of the property, so it could be said the trust has survivorship rights. But does it work the other way? No, it does not. A trust cannot be part of a joint tenancy because it is not a natural entity that can experience death.  Sure, the trustee can die, but a trustee is not the owner of the property, he or she is just the manager of the trust. When a trustee dies, the trust simply has provisions for successor trustees to continue management of the trust. If the settlor of the trust dies, the trust dictates to whom trust property is to be distributed.  In other words, for all intents and purposes Wendy Wife does not and cannot have a survivorship interest, no matter what the words in the deed say.  Therefore, the unity of survivorship interests requirement needed to create a joint tenancy has not been met.

So, what happens when the joint tenancy vesting fails?  It reverts to a tenancy in common, and in our case that means Wendy Wife’s ½ interest will not be absorbed by the trust on her death but will need processed through probate.  That is clearly not what the borrowers want, as evidenced by the way they attempted to hold title.  As an alternative, they might want to amend the Harry Husband Trust to add Wendy Wife as a beneficiary, or they may want to put a ½ interest into a trust created specifically for Wendy Wife.

Either way, ARS recommends they consult their attorney to craft a solution that meets both their estate planning needs and the lender’s requirements.

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