BREAKING UP IS HARD TO DO, AND WHAT HAPPENS TO JOINTLY HELD PROPERTY?
PART II: DOMESTIC PARTNERSHIPS AND DISSOLUTION
One of the ultimate gifts that you can give someone is an interest in real estate. If you are married, you own property with your spouse as Tenants by the Entirety (unless expressly stated otherwise), but what about unmarried couples? People often add their significant other to title to real estate that they are buying or already own as a gesture of love and commitment. It should come as no surprise that relationships sometimes go sour, people break up, and those well-intentioned individuals often regret adding their ex to title when they learn the cost of removing them. What should you (or your client) consider before adding a boyfriend or girlfriend to title? Be proactive and find out here.
How Can Non-Married Couples Hold Title to Property?
Option 1: Joint Tenants with Right of Survivorship
In a Joint Tenancy, two or more persons (“tenants”) own an entire, undivided interest in a property. Upon the death of one of the tenants, that tenant’s share is automatically transferred to the surviving tenants, who continue to retain an undivided ownership interest as co-owners of the property. This right of survivorship makes a Joint Tenancy unique and continues until there is only one remaining survivor, who then has sole ownership in the entire property. It is important to remember that the law will not imply a Joint Tenancy if the parties have failed to state it in the Deed. In fact, when the intent to create a Joint Tenancy is not clearly expressed, the courts in Maryland may hold that the conveyance created is a Tenancy in Common (see below). As such, if purchasers wish to hold title as Joint Tenants, it is suggested that they expressly state their intention to take title as “Joint Tenants with Right of Survivorship” in the Deed.
Option 2: Tenants in Common
When property is owned by two or more persons as Tenants in Common, each owner
(“tenant”) has a distinct, proportionate, undivided interest in the property. Each owner is entitled to possession of the whole property, regardless of whether the tenants own the property in equal shares. Unless expressed otherwise in the Deed, each Tenant in Common is presumed to take an equal share in the property. When one tenant dies, unlike a Joint Tenancy, there is no right of survivorship with regard to that tenant’s share. Upon death, the tenant’s share will pass to their devisees by Will or beneficiaries by the laws of intestate succession (inheritance statutes applied by the State for distribution of property when the deceased does not have a Will). Another important distinction from a Joint Tenancy is that any Tenant in Common owner may, at any time, and without consent of the other owners, freely sell, assign, or convey to another their ownership interest by Deed. In summary, if the intent of the parties is that their individual interests will be conveyed to the other tenants upon death, a Tenancy in Common will not accomplish this goal, but a Joint Tenancy with Right of Survivorship will.
What Could Possibly Go Wrong?
Breaking Up Has A Price: The Home Buyer, The Dancer, and The Impulse Decision
Not long ago my law firm was involved with a settlement where the Buyer, Mr. B, wanted to suddenly add someone to title two weeks before the closing date. Mr. B was on his way to purchasing a new construction home and was the sole borrower on the mortgage. One of our Village attorneys received a call from Mr. B who joyfully explained that while recently out-of-state for the weekend he met someone, a dancer (Ms. Dee), who he realized was “the one.” Mr. B explained how they were in love and planned to get married soon, but in the meantime, he wanted to ensure that Ms. Dee was added to the title of the property. The Village attorney, hearing this and realizing that Mr. B’s closing date was fast approaching, replied: “This seems a little sudden. Are you sure you want to add her to title? If you break up or change your mind after she becomes a co-owner, you may have to pay to take her off title unless you qualify as . . . .” Mr. B interrupted and assured the attorney he was certain that he wanted Ms. Dee on title, refusing to entertain the important question of: What could possibly go wrong?
On the day of Mr. B’s closing, Ms. Dee came into our office to sign the Deed of Trust (as she was becoming a record owner of the property), and the Principal Residence Affidavit to the Deed, but of course, did not sign any of the loan documents because she was not on the loan. She had the best of both worlds: Ownership of property and without any of the financial responsibility for payment of the mortgage.
It was not three weeks after settlement when the Village attorney received a phone call from Mr. B that began something like: “I think I’ve made a mistake . . . .” You can probably guess what came next (“We broke up”), and how the conversation ended: “How can I remove her from title?” The Village attorney explained that Ms. Dee can be taken off title, but it will cost Mr. B. Let me explain:
Besides payment of document preparation and recording fees to record a new Deed, the State of Maryland will tax the transfer between former significant others, unless the parties can qualify for the domestic partnership exemption (discussed below). What is worse is that many ex’s will use their position as a co-owner as leverage to extort money from the ex acting to remove them. In Mr. B’s case, Ms. Dee did just that. She requested a payout in return for signing the new Deed, which Mr. B paid, in addition to: document preparation and recording fees and State transfer and recordation taxes based on one-half (1/2) of the current full assessed value of the property as shown by the State Department of Assessments and Taxation. All costs to Mr. B totaled about nine thousand dollars ($9,000.00). Unfortunately, due to the short-term relationship and not having the required documentation, they did not qualify for the domestic partnership exemption recognized by the State.
Mr. B is not alone in the headache he faced removing a former flame from title. Our law firm has handled a number of cases with the same goal of removing an ex from title. Many other Mr. B’s (or Ms. B’s) are shocked to learn that there is State transfer and recordation tax (and county transfer tax if applicable) charged when a significant other is removed from title, unless the parties qualify as former domestic partners.
What Are the Requirements for the Domestic Partnership Exemption?
The Tax-Property Article defines a domestic partnership as: a relationship between two individuals who:
(1) are at least 18 years old;
(2) are not related to the other by blood or marriage within four degrees of consanguinity under the civil law rule;
(3) are not married or a member of a civil union or domestic partnership with another individual;
(4) agree to be in a relationship of mutual interdependence in which each domestic partner contributes to the maintenance and support of the other domestic partner and the relationship, even if both domestic partners are not required to contribute equally to the relationship; and
(5) share a common residence where both domestic partners live, even if:
(i) only one of the domestic partners has the right to legal possession of the common residence; or
(ii) one of the domestic partners has an additional residence
Md. Code. Ann., Tax-Property Sec. 12-101(e-2). If the parties meet the above requirements, the next question is: Do they have the requisite evidence recognized by the State to establish a domestic partnership? Evidence of at least two of the following is required:
(i) joint liability of the individuals for a mortgage or other loan or for a lease;
(ii) the designation of one of the individuals as the primary beneficiary under a life insurance policy on the life of the other individual or under a retirement plan of the other individual;
(iii) the designation of one of the individuals as the primary beneficiary of the will of the other individual;
(iv) a durable power of attorney for health care or financial management granted by one of the individuals to the other individual;
(v) joint ownership or lease by the individuals of a motor vehicle;
(vi) a joint checking account, joint investments, or a joint credit account;
(vii) a joint renter’s or homeowner’s insurance policy;
(viii) coverage of one of the individuals under a health insurance policy of the other individual;
(ix) joint responsibility for childcare, such as school documents or guardianship documents; or
(x) a relationship or cohabitation contract.
Sec. 12-101(e-3). In addition to submitting evidence demonstrating two of the above criteria, the applicants must sign under penalties of perjury the State Domestic Partners Affidavit confirming that they are former domestic partners and the domestic partnership they once had has been dissolved. Assuming that the Clerk of the Court finds the Affidavit and supporting documentation sufficient, the transfer of property from former domestic partners to one individual as sole owner will be exempt from State transfer and recordation tax. Conversely, this Affidavit and documentation may be submitted in the event a property owner wants to add a domestic partner to title and avoid paying taxes on the transfer. See Sec. 12-101(e-2-3).
Dissolution of a domestic partnership can also include the situation where one domestic partner has died and their personal representative, using the Affidavit and supporting documentation, signs a new Deed transferring the deceased’s interest in the property to the surviving domestic partner. See Sec. 12-101(e-4).
Non-married couples can take title to property as: 1) Joint Tenants With Right of Survivorship, which includes an automatic survivorship interest upon the death of one tenant to the surviving tenants until there is one tenant remaining who becomes the sole owner, or 2) Tenants in Common, where each tenant holds a fractional interest in property that upon the death of a tenant, gets distributed according to the deceased’s Will, if created, or the State’s inheritance statutes. Removing a former flame from property title can become more complicated not to mention costly than one would think. If an ex is a co-owner of property, you cannot avoid involving that person in the transfer of title. The fact that the ex is not a borrower on the Note does not matter. If the parties can qualify for the domestic partnership exemption, the transfer will be exempt from State transfer and recordation taxes, although a party may use their signature on a new Deed as leverage for a payout. Considering the aggravation and potential costs of transferring title between ex’s, it may be prudent planning to evaluate the longevity of the relationship before adding a significant other to title, or the other way around, as the one being added to another’s property title. Of course, not all headaches can be avoided, and life certainly can move in unexpected directions, but at least you can take comfort in the fact that you looked before you leapt.
Readers with questions about this or any real estate legal matter can reach Dave Parker at 301-590-9300.