In January 2010, the New York Times published an article in the real estate section about the growing number of unmarried couples purchasing real estate together (“Come Buy With Me and Be My Love“). While the attraction may be low mortgage rates or the ability to buy a more desirable property that the current housing market has placed within an unmarried couple’s reach, the couple in consultation with their attorneys should give care and thought to such issues as to how the property will be titled, how the property will be treated in each party’s Will, how payments and tax issues will be apportioned, and whether a new deed will be drafted and recorded in the event that the couple marries.
For an unmarried couple wishing to purchase real estate together, a prenuptial agreement can resolve these issues before the purchase is made. Domestic Relations Law (DRL) 236[B](3) recognizes provisions in prenups “for the ownership, division or distribution of separate and marital property.” As we shall see, the way in which a property is titled has some serious repercussions.
To simplify this discussion, I have divided ownership types by whether or not they have a right of survivorship, meaning that the surviving tenant will become the owner of the entire property without Probate. The surviving tenant’s claim on the property will be first in line over any other claims on the property.
There are two ways to title property to ensure the right of survivorship. The first is available only to married couples: tenancy by the entirety. For married couples in New York, this is the default title. It affords certain rights not available to unmarried couples. Tenancy by the entirety presupposes that in marriage the two become one. The law views the couple as a single unit. Each spouse owns an undivided 100% of the property. Neither spouse can sell or diminish the 100% share that each owns without the consent of the other. Should a creditor obtain a lien on one spouse’s interest in the property, the lien will only survive if the debtor spouse is the surviving spouse. Otherwise, the lien is extinguished with the death of the debtor spouse. Moreover, the property cannot be reached in a bankruptcy proceeding.
Joint tenancy with right of survivorship provides some of the same protections for an unmarried couple. Each person owns an undivided 100% interest. However, one party may transfer or put a lien on his/her interest without the knowledge or consent of the other joint tenant, thereby severing the joint tenancy and making the property a tenancy in common. Moreover, the interest of each joint tenant can be attached by creditors or in bankruptcy. When attachment takes place, the property can be sold to recover against the debt, and the proceeds of the sale will be divided between the unencumbered party and the bankruptcy trustee.
When a joint tenant transfers his/her interest to a third party, the joint tenancy with right of survivorship is severed and the parties become tenants in common with no right of survivorship. Why is this important? First, it can be done without the knowledge or consent of the other party. Secondly, it can undo the estate planning that the other party has done, particularly if there is every expectation by the non-suspecting party that the property will pass outside Probate to the surviving party.
Tenants in common have no right of survivorship. When one tenant in common dies, their property rights pass according to their wishes in their Will, or by the applicable rules of intestacy if they die without a Will. Each tenant in common enjoys full possession of the property and may not be excluded without compensation. Tenants in common need not have equal shares, and more than two persons may own the property together. A tenancy in common affords no protection from creditors or the bankruptcy court. One joint tenant can transfer his/her ownership rights to a third party without the consent of the other, effectively giving the other co-tenant a new “roommate.” That third party will now be in possession with the remaining original co-tenant. The only remedy that the remaining original remaining co-tenant has is to demand a sale of the property and a division of the proceeds.
With a prenuptial agreement, the couple can clearly designate how the property will be titled. In addition, they can agree to apportion payments based on a percentage of each other’s earnings, reviewable on a yearly basis. Since each party will be filing taxes separately until the marriage, the prenuptial agreement can spell out the pro rata percentage that can be used for deductions on the IRS’s Schedule A.
Finally, the prenuptial agreement can spell out if and how the unmarried couple will re-title the property as a tenancy by the entirety in the event of a marriage. Will the property become marital property, or will it remain separate property? Being up-front about one’s intentions can spare both parties much anxiety and grief, and also bring clarity to each party’s estate planning.
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