I understand the value of a nickel. I do.
But I also understand the value of a dollar. As a youngster, I heard the saying “Don’t be pennywise and pound foolish.” The translated meaning of that? It’s possible to be very careful about minor expenses – and then to lose large amounts of money due to poor judgment or bad decisions.
I sometimes see this in the context of good, honest, honorable hardworking people who have worked all their lives to put away something for retirement. They’ve scrimped and saved and gone without so that they could put money away for the future. That’s an admirable trait. But when it comes to investment of the big nest egg they’ve saved, they lack the sophistication to properly manage their risk, or their investments, and sometimes they can lose a big part of what they’ve saved. Sometimes it’s just back luck, but sometimes it’s a desire to save on the cost of employing a skilled professional. There’s no law that says an individual has to hire a qualified portfolio manager to invest their life savings. There’s no law that says an individual has to hire legal counsel to review a contemplated real estate transaction, or a change in title. But these types of transactions can have hidden risks that an ordinary lay person might not appreciate, and a single misstep in these types of decisions can be costly.
Take, for example, a change of title. Sometimes a couple may want to pass on one of their properties to a son or a daughter. I often hear of this as just “putting someone on title.” The concept is that the parents eventually intend to bequeath this property to their son or daughter anyway, so why not just put them on title now? The potential downside is that such a simple transaction fails to take into account the many complexities that exist in a real estate transaction.
In the first place, many laws govern real estate transactions. Some of these laws don’t apply to a transfer from parent to child, but others do. A simple “paper transfer” won’t comply with many of these laws. Why set up a transaction that doesn’t comply with the law? That’s never a good idea.
In the second place, there can be unforeseen risks with “putting someone on title” regardless of whether it’s a brother, a sister, an uncle, an aunt, a friend or someone else. What happens if that person runs into financial difficulty and files a petition in bankruptcy? The bankruptcy trustee will probably want to know all real estate transfers made by this person in the previous 10 years. There will be questions about who really owns the property. If there’s a lot of value in the property, then creditors may be motivated to claim that the holder of title is actually the true owner of the property. If that’s not the case, then perhaps a creditor’s claim can be defeated. But this might involve a lawsuit, which can be expensive — and perhaps very expensive.
Or suppose title goes into someone else’s name, and then that person is sued – maybe they get into a car accident, or they have a business reversal, or whatever. Again, creditors may be on the lookout for assets – and real property is like a big sitting target. Ownership information is available to the general public, and it’s not difficult to access it if you know how. Trying to convince a creditor that uncle Bill is just “holding title” may be expensive – and may or may not be successful.
And what about the tax issues? There can be substantial tax benefits connected with a mortgage interest deduction that could potentially be affected by a poorly planned property transfer. Or there can be issues with appreciation. During some time periods, real property values appreciate. This appreciation can be subject to tax in some circumstances, and this may be adversely affected by a casual transfer of title. Moreover, property taxes are calculated on the value at a time of transfer. If property is not held in the name of the true owner, then issues can arise about property taxes that might have been avoided had title been properly conveyed and titled.
Or what about potential liability of landowners? Sometimes landowners can be liable for cleanup costs for pollution that occurs on their land, and sometimes they can be liable for accidents that occur on their land. Persons who agree to hold title for someone else could unintentionally be setting themselves up for a big fight over who the true owner is, and what their liability could be for issues relating to the land.
As with many legal matters, real property title issues can be complex. Persons interesting in selling property or in transferring title would do well to consult competent legal counsel.