…could lead to trouble down the road.
by Grace S. Yung, CFP
When investing and building wealth for the future, one of the issues that many people don’t think about is how their assets are titled. That becomes especially important when a home or auto is purchased. For opposite-sex married couples, this is typically not an issue, as assets will usually pass to the surviving spouse in the event of a death. But this is not usually the case for same-sex couples.
With this in mind, it is important to understand the different types of asset titling that are available, and which option is best for same-sex couples. Incorrectly titling a property or asset could end up leaving a partner out in the cold!
Types of Asset Ownership
There are several different types of property ownership, and each one has its advantages and disadvantages, depending on the owner’s goals. The most commonly recognized of these include:
• Sole ownership
• Tenancy in common
* Tenancy by the entirety
• Community property
• Joint tenancy with right of survivorship
• Sole Ownership
Sole ownership is also referred to as “fee simple.” With this type of ownership, the holder of the asset or property holds total and sole control, both during their life and at death. Therefore, the asset cannot benefit any other person, and it must pass through probate when the owner passes away.
This means that these assets would pass to the deceased person’s next-of-kin. Because of this, sole ownership is not generally beneficial for LGBT partners—especially those who live in states that do not recognize same-sex marriage.
• Tenancy in Common
With tenancy in common, two or more individuals can have unequal proportions of ownership. Here, too, an individual’s owned portion of the asset or property will typically need to pass through probate at death.
However, title can also be passed to any beneficiary that the individual chooses. With this in mind, if a beneficiary is named through the asset owner’s will, for example, this form of asset ownership can be a good option for LGBT partners who wish to transfer property to one another.
• Tenancy by the Entirety
Tenancy by the entirety occurs when the owners of an asset or property are married at the time that title is received. It permits the spouses to own the property jointly as a single legal entity, and the tenancy can be terminated either by the death of one spouse, divorce, or by mutual agreement of both individuals. Because this type of ownership is restricted to legally married spouses in most states, it is not a good option for most in the LGBT community.
• Community Property
Likewise, community property is also a legal definition that exists in order to protect spousal rights when it comes to property or assets. Here, the spouse of the asset owner who resides in a state that recognizes community property rights must be the sole beneficiary of the account that is designated as marital property.
• Joint Tenancy with Right of Survivorship
One of the best options for owning property for LGBT partners, whether married or not, is through joint tenancy with right of survivorship. With this type of ownership, the co-owners have a “right of ownership,” meaning that if one passes away, that owner’s interest passes to the other owner (or owners) by law. This will avoid the long and costly process of probate altogether. It can also bypass the potential for family members or others who may contest the deceased individual’s will and demand the asset.
• Transfer on Death (TOD)
Transfer on Death, or TOD, is another way to designate a beneficiary to receive assets without the need to go through the probate process. In addition, this type of designation will also allow an individual to specify the percentage that each beneficiary will receive.
The asset (or assets) can then be automatically transferred upon death. TOD is also used by LGBT couples—especially in cases where one partner or the other may wish to bypass immediate family members in order to transfer assets to a married or unmarried partner.
In addition to proper titling for asset transfer at death, there are other reasons to make sure that assets are titled properly. Improper titling can also become a potential liability if, for example, both partners own the same vehicle. It is best for each person to keep their vehicles titled separately, as both could be sued in the event of an accident—even if only one of the partners was the driver who was at fault.
Taking the Next Step
While it is good to have an understanding of how asset titling works, it is always best to work with a professional in the area of tax, legal and finance—especially someone who has experience working with the LGBT community—prior to moving forward. This way, you can be better assured that you have all of the needed information.
Personal finance-related questions may be e-mailed to [email protected]
Grace S. Yung, CFP, is a certified financial planner practitioner with experience in helping domestic partners plan their finances since 1994. She is a principal at Midtown Financial LLC in Houston.