According to the 2010 Current Population Survey (conducted annually by the U.S. Census Bureau), there are about 7.5 million unmarried opposite-sex couples cohabiting in the United States today, a well as another 620,000 same-sex couples. The same source reported that married couples now account for only 48 percent of all households. Attorneys who assist clients buying homes need to be aware of the choices and strategies available to unmarried couples buying homes together and not assume that the options are the same as those available to a typical married couple.
Suppose Jason and Jennifer, an unmarried couple, have come to you to help them buy a house. Early on, you need to advise them on how they should hold title to the property. Before you can do that, you need to spend time to understand what their goals and plans are. Do they intend to share equally in paying the mortgage, expenses, and upkeep? Is one of them contributing the entire down payment? Are there judgment liens against one partner that could attach to the house if his or her name is on the deed? What do they want to happen when one of them dies? Will the house pass to the survivor? Do they have children from prior relationships whom they want to protect? Does either of them receive public benefits that may be placed at risk by ownership of the home, or that may risk impoverishing the partner? Medicaid, for example, does not apply community spouse resource allowance rules to prevent impoverishing an unmarried partner. (The above analysis would be the same for an unmarried same-sex couple, although in a community-property state such as California, registered domestic partners will be treated by the Internal Revenue Service as married for certain purposes.)
Forms of Co-ownership
Once you have discussed your clients’ expectations and goals, you will be able to advise them how to accomplish those goals as they make this major purchase. One option is for only one partner to take sole ownership of the house. This may be appropriate if the other partner has judgments that could attach to the property (or has defaulted on loans and may have significant judgments against him or her in the near future), or if that partner has such a poor credit history that the couple would be rejected for a mortgage loan. In most cases, especially if both partners are contributing to the purchase and upkeep, you would not suggest this option because the rights of the party without formal ownership would be severely compromised in the event of a later breakup.
For most couples, some form of co-ownership is a better choice. The most common form of co-ownership for married couples, tenancy-by-the-entirety, is available only to married spouses, so this choice is not an option for Jason and Jennifer. The two remaining forms of co-ownership are as “tenants in common” or as “joint tenants,” also known as “joint tenants with right of survivorship.” (It is essential to remember to add the words “with right of survivorship” in the deed.)
Property owned as tenants in common may be owned by two or more parties with equal or unequal percentages of ownership. (For example, the deed could convey “a 45 percent interest to Jason Smith, an unmarried person, and a 55 percent interest to Jennifer Young, an unmarried person, as tenants in common.”) When the property is sold, each partner would receive his or her specific share of the proceeds, based on percentage of ownership, which is reflected in the deed of conveyance. Each partner can sell all or a portion of his fractional interest to a third party or can devise it by will to anyone. In the event that Jason dies without a will, his 45 percent interest in the home would pass to his heirs according to the intestacy rules of his state of residency. Some couples will choose this as the preferable form of ownership. For example, Harold and Jane, both previously married with children and grandchildren of their own, may prefer to leave their estates to their respective children, with the expectation that the surviving partner will be able to make other living arrangements. Or Jane and Harold might choose to have their respective living trusts hold title as tenants in common, and designate in the trust agreements what rights the surviving partner has to remain in the house, with heirs receiving the remainder interest. Unless the partners intend to leave their interest in the house to someone other than each other, however, tenants in common is not a good option for most committed couples.
Joint tenants with right of survivorship (JTWROS) is usually the preferred form of co-ownership for unmarried couples buying a home together. At common law, joint tenancy is co-ownership of property by two or more persons characterized by the “four unities:” (1) unity of interest (all co-owners have equal ownership interest), (2) unity of time (all co-owners acquire their interest at the same time), (3) unity of title (all co-owners acquire their interest by the same instrument), and (4) unity of possession (all co-owners have an equal and undivided right to possession of the property). The main difference between owning property as tenants in common and as JTWROS is the survivorship characteristic. When Jennifer dies, her interest in the property automatically transfers to Jason, even if she dies without a will. (Co-ownership as JTWROS will override any subsequent attempt to devise the property by will because there will be no remaining interest to devise.) For most committed couples, JTWROS most nearly represents their intentions for disposition of the property following the death of one partner.
Regardless of how Jason and Jennifer choose to hold title to their new home, you should also recommend that you prepare a contract detailing how expenses and ownership will be shared. Without a written co-ownership agreement, a court may be reluctant to award any reimbursement to the party whose name is not on the deed or who has paid a disproportionate amount of expenses if the relationship sours in the future. This reluctance is particularly acute in jurisdictions that have enacted “anti-Marvin” laws, which limit the rights of cohabitants to claim compensation under equitable theories when their relationships end, as per Marvin v. Marvin, 18 Cal. 3d 660 (1976).
Adding a Partner to the Deed
The day after Jason and Jennifer visit you, another unmarried couple visit. Linda and Michelle have been living together in Linda’s house for a little over a year and are planning a commitment ceremony for next month. (Linda and Michelle can legally marry in only six states in the United States, plus the District of Columbia.) To confirm their life commitment, Linda has decided to add Michelle’s name on the deed to the house. They have been told they don’t need a lawyer to do this—they can buy a deed form at an office supply store, or download one from the Internet, and record it. Wisely, Linda and Michelle decided to consult with you first to make sure they do it right and don’t cause themselves unanticipated problems down the road. Although you advised Jason and Jennifer yesterday that JTWROS was the best way in which to hold title, you may have a different suggestion for Linda and Michelle.
Why not just suggest a JTWROS deed? Remember the four unities discussed above? In some states an owner cannot simply deed property from herself to herself and another as JTWROS because the co-owners would not have acquired their interest at the same time or by the same instrument. (This drawback may be overcome in many jurisdictions by use of a “straw man” conveyance.) Some jurisdictions still require strict adherence to the four unities, although many states have abolished the requirement by statute or case law. Even if your jurisdiction permits a joint tenancy to be created by a deed from Linda to Linda and Michelle, there may be other very good reasons to advise them against such a transfer. How long has Linda owned the house? How much equity does she have in it? If she simply records a deed from herself to herself and Michelle as JTWROS, Linda will be deemed to have made a gift to Michelle of 50 percent of her equity in the house. Such a transfer may have gift tax implications. Additionally, Michelle will carry over Linda’s basis in her half-interest in the property, possibly triggering unnecessary capital gains on a future sale. Is there a mortgage on the property? Most likely, the transfer would require the mortgage to be refinanced because the conveyance would undoubtedly trigger the due-on-sale-or-transfer provision of the mortgage. (Transfers between unrelated persons are not exempt under the Garn–St. Germain Depository Institutions Act.) Finally, the deed would be irrevocable. If the couple’s goals diverge, or the relationship disintegrates in the future, Linda would have no legal right to have Michelle deed the property back to her and no way to force the removal of Michelle’s name from title without a court proceeding.
Alternatives to JTWROS
Linda and Michelle have better options, and they have you to help them to choose. If they still want to own the home as joint tenants (provided the applicable jurisdiction does not hold to strict requirement of the four unities and a mortgage due-on-sale clause is not a problem), Linda could make a loan to Michelle to enable her to purchase from Linda one-half undivided interest in the house as JTWROS. The loan can be secured by a mortgage on Michelle’s interest, and the interest paid treated as deductible mortgage interest. (Be aware that in some states, the mortgage/deed of trust might itself sever the joint tenancy.) Another option might be an earn-out, by which Michelle purchases a one-half interest by installments (not for the faint of heart, and not an option in a jurisdiction in which joint tenants must own equal shares).
Linda could also protect Michelle (while protecting herself against losing her home if the relationship goes south) by using ordinary estate-planning methods—leaving the house to Michelle by will or via a living trust. You could advise Linda that using an enhanced life estate, also known as a “Ladybird deed,” permits the grantor to retain a life estate and also most of the incidents of ownership, including the right to transfer or encumber the property in the future. Not all states recognize Ladybird deeds, and one potential pitfall of the deed is this: Although the grantor retains the right to transfer the property in the future, it is possible that judgment liens against the remainderman (Michelle) may attach to the property, making it difficult for Linda to transfer the property in the future. In circumstances like these, I have suggested the use of a transfer on death deed (TODD), also known in some states as a beneficiary deed. A beneficiary deed or TODD is currently authorized in at least 12 states, avoids probate, avoids deed tax in many states, and is absolutely revocable before the death of the grantor. Be sure the TODD is recorded before the grantor’s death, or it will be void and the house will pass by will or rules of intestacy. If Linda and Michelle are still unmarried at the time of death of the grantor, the transfer to Michelle will trigger a due-on-sale clause in the mortgage because it is not an exempt transfer under Garn–St. Germain. (The same outcome would occur with a Ladybird deed or TODD.) Linda and Michelle are glad they asked for legal advice and leave your office happily dreaming of their upcoming ceremony.
When Bad Things Happen to Good Relationships
Nicole and David bought a house together eight years ago. They never married and have no children. They own their house as JTWROS. The romance has faded, and David has come to you, asking for help with the breakup. Most breakups are messy, wreaking havoc on our clients’ psyches and checkbooks, but special challenges await unmarried co-owners in a breakup. The ex-partners will face many of the same conflicts faced by divorcing couples, yet the ordinary rules that would be applied in divorce court are not applicable to them. Unmarried partners also cannot take advantage of tax-free transfers available to spouses dividing up property or buying out a partner’s interest in the house. As they untangle their affairs, the couple will confront practical questions. Who keeps the house? Can they agree that one will leave and the other will stay? Can David afford the mortgage, insurance, taxes, and upkeep alone? Is he able to refinance the mortgage to remove Nicole from the title to the property? Even if they both agree to let David take over the mortgage and continue living in the house, Nicole will remain liable on the promissory note, unless the mortgage holder releases her, and any default will be reported as a default (or foreclosure) on her credit history—whether she lives in the house or not. If David keeps the house, he will ordinarily purchase Nicole’s share of the equity. If David and Nicole cannot agree on a fair price, the best answer may be to pay for an appraisal by a licensed appraiser.
If David and Nicole cannot reach agreement, you can suggest alternatives to litigation, such as mediation or arbitration. In many ways, the estranged couple is in a similar situation as business partners who no longer like working together, no longer trust each other, and never planned ahead with a buy-sell agreement.
If Nicole and David cannot reach an agreement, or if neither one can afford the mortgage alone, the house will have to be sold. This can be accomplished without resorting to the courts if the parties can cooperate—such as by designating a trusted real estate agent to advise them on market conditions and purchase offers. If they cannot agree, the final resort is a proceeding for partition. Because a house cannot be physically partitioned, the court will order the house sold and then will determine how the net proceeds, if any, are to be distributed after payment of all liens on the property. Net proceeds need not (and often will not) be divided equally. One partner may claim excess contributions, the owners may possess unequal percentages, or one partner may owe the other money, all of which can affect how proceeds are divided. Most partition statutes permit the court to grant the property in its entirety to the petitioner, subject to payment to the other owner of the value of his or her interest. That payment can also be offset by unreimbursed expenses and other amounts owed to the homeowner by the departing partner.
Home ownership by unmarried couples has a number of challenges unlike transactions with married couples. It is important for lawyers to recognize these differences in order to help clients achieve their goals and enjoy the full benefits of home ownership.